UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - QSB
- -----
X QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
For the quarterly period ended March 31, 2005
- -----
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- -----
For the transition period from ______ to ______
Commission File Number 0-32623
------------------------------
Nittany Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2925762
- --------------------------------------------- ---------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2541 E. College Avenue, State College, Pennsylvania 16801
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(814) 238 - 5724
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at May 12, 2005: 2,110,794
NITTANY FINANCIAL CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
March 31, 2005 and December 31, 2004
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 2005 and 2004 4
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 2005 and 2004 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Three Months ended March 31, 2005 5
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended March 31, 2005 and 2004 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
SIGNATURES 19
CERTIFICATIONS
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
March 31, December 31,
2005 2004
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 915,958 $ 1,094,763
Interest-bearing deposits with other banks 8,814,297 14,487,813
------------- -------------
Cash and cash equivalents 9,730,255 15,582,576
Investment securities available for sale 1,956,868 2,084,223
Investment securities held to maturity (estimated
market value of $42,377,341 and $37,502,230) 42,817,595 37,491,341
Loans receivable 244,412,102 237,626,883
Less allowance for loan losses 2,260,408 2,198,315
------------- -------------
Net loans 242,151,694 235,428,568
Premises and equipment 3,587,308 2,609,528
FHLB Stock 2,212,900 2,066,100
Goodwill 1,763,231 1,763,231
Accrued interest and other assets 2,687,858 2,210,133
------------- -------------
TOTAL ASSETS $ 306,907,709 $ 299,235,700
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 11,956,709 $ 10,668,777
Interest-bearing demand 26,051,710 25,614,681
Money market 34,254,744 43,191,121
Savings 148,020,380 157,200,274
Time 32,459,625 21,596,027
------------- -------------
Total deposits 252,743,168 258,270,880
Short-term borrowings 22,277,783 14,838,231
Other borrowings 7,122,345 7,180,612
Accrued interest payable and other liabilities 1,653,000 1,279,653
------------- -------------
TOTAL LIABILITIES 283,796,296 281,569,376
------------- -------------
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, 2,110,794 and 1,930,794 issued and outstanding 211,079 193,079
Additional paid-in capital 18,863,413 14,339,979
Retained earnings 4,047,959 3,139,165
Accumulated other comprehensive loss (11,038) (5,899)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 23,111,413 17,666,324
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 306,907,709 $ 299,235,700
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three-months Ended March 31,
2005 2004
---------- ----------
(unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,527,905 $2,757,840
Interest-bearing deposits with other banks 80,161 15,366
Investment securities 382,210 391,059
---------- ----------
Total interest and dividend income 3,990,276 3,164,265
---------- ----------
INTEREST EXPENSE
Deposits 1,256,943 1,159,700
Short-term borrowings 95,870 5,981
Other borrowings 135,818 137,692
---------- ----------
Total interest expense 1,488,631 1,303,373
---------- ----------
NET INTEREST INCOME 2,501,645 1,860,892
Provision for loan losses 62,000 110,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,439,645 1,750,892
---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 164,567 146,061
Asset management fees and commissions 697,770 566,745
Other 64,053 10,130
---------- ----------
Total noninterest income 926,390 722,936
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 780,841 692,765
Occupancy and equipment 176,874 176,336
Professional fees 63,021 43,449
Data processing fees 131,562 119,007
Supplies, printing, and postage 50,301 32,993
Advertising 62,582 40,405
ATM processing fees 36,452 34,871
Commission expense 429,573 377,506
Other 237,036 165,445
---------- ----------
Total noninterest expense 1,968,242 1,682,777
---------- ----------
Income before income taxes 1,397,793 791,051
Income taxes 489,000 295,000
---------- ----------
NET INCOME $ 908,793 $ 496,051
========== ==========
EARNINGS PER SHARE
Basic $ 0.45 $ 0.26
Diluted 0.42 0.24
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 1,997,751 1,924,621
Diluted 2,154,724 2,074,229
See accompanying notes to the unaudited consolidated financial statements.
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Loss Equity Income
-------------- ------------- ------------- ------------- ------------- --------------
(unaudited)
Balance, December 31, 2004 $ 193,079 $ 14,339,979 $ 3,139,165 $ (5,899) $ 17,666,324
Net income 908,793 908,793 $ 908,793
Other comprehensive income:
Unrealized loss on available for sale securities
net of tax benefit of $2,648 (5,139) (5,139) (5,139)
--------------
Comprehensive income $ 903,654
==============
Stock Offering - 180,000 shares at $26 per share
(net of offering expenses) 18,000 4,523,434 4,541,434
-------------- ------------- ------------- ------------- -------------
Balance, March 31, 2005 $ 211,079 $ 18,863,413 $ 4,047,959 $ (11,038) $ 23,111,413
============== ============= ============= ============= =============
See accompanying notes to the unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three-months ended March 31,
2005 2004
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 908,793 $ 496,051
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for loan losses 62,000 110,000
Depreciation, amortization, and accretion, net 128,578 180,681
Increase in accrued interest receivable (86,145) (67,586)
Increase in accrued interest payable 127,833 53,236
Other, net (143,420) 279,904
------------ ------------
Net cash provided by operating activities 997,639 1,052,286
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities 118,004 841,959
Investment securities held to maturity:
Purchases (9,119,951) (10,855,899)
Proceeds from principal repayments and maturities 3,731,514 5,214,013
Net increase in loans receivable (6,783,055) (12,510,284)
Purchase of FHLB stock (146,800) (82,200)
Purchase of premises and equipment (1,044,679) (68,379)
------------ ------------
Net cash used for investing activities (13,244,967) (17,460,790)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (5,527,712) 16,772,862
Net increase in short-term borrowings 7,439,552 145,799
Repayment of other borrowings (58,267) (54,768)
Proceeds from the sale of common stock 4,541,434 -
Cash paid in lieu of fractional shares - (3,472)
------------ ------------
Net cash provided by financing activities 6,395,007 16,860,421
------------ ------------
Increase (decrease) in cash and cash equivalents (5,852,321) 451,917
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,582,576 14,953,286
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,730,255 $ 15,405,203
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 1,360,798 $ 1,250,137
Income taxes 137,500 336,500
See accompanying notes to the unaudited consolidated financial statements.
6
NITTANY FINANCIAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Nittany Financial Corp. (the "Company")
includes its wholly-owned subsidiaries, Nittany Bank (the "Bank"), Nittany Asset
Management, Inc, and Vantage Investment Advisors, LLC. 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 months ended March 31, 2005 are not necessarily
indicative of the results to be expected for the fiscal year ended December 31,
2005 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, 2004, 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
March 31,
2005 2004
-------- --------
Net income, as reported: $908,793 $496,051
Less proforma expense related
to stock options 13,855 29,747
-------- --------
Proforma net income $894,938 $466,304
======== ========
Basic net income per common share:
As reported $ 0.45 $ 0.26
Pro forma 0.45 0.24
Diluted net income per common share:
As reported 0.42 0.24
Pro forma 0.42 0.22
7
NOTE 2 - EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. For the three months ended March 31, 2005 and 2004, the diluted
number of shares outstanding from employee stock options was 156,973 and
149,608, respectively.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the three months ended March
31, 2005, this activity is shown under the heading Comprehensive Income as
presented in the Consolidated Statement of Changes in Stockholders' Equity. For
the three months ended March 31, 2005, comprehensive income totaled $903,654.
For the three months ended March 31, 2004, comprehensive income totaled
$512,845.
NOTE 4 - STOCK OFFERING
In November 2004, the Board of Directors approved a stock offering which was
completed during the first quarter of 2005 to existing shareholders and to the
public. As a result, 180,000 additional shares of the Company's stock were
issued, common stock was increased by $18,000, and surplus was increased by
$4,523,434, the net proceeds of the offering.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2005, the Securities and Exchange Commission adopted a new rule that
amends the compliance dates for Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (FAS No. 123R). The Statement requires that compensation cost relating
to share-based payment transactions be recognized in financial statements and
that this cost be measured based on the fair value of the equity or liability
instruments issued. FAS No. 123 (Revised 2004) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company will adopt FAS No. 123 (Revised 2004) on January 1,
2006 and is currently evaluating the impact the adoption of the standard will
have on the Company's results of operations.
In December 2004, FASB issued FAS No. 153, "Exchanges of Nonmonetary Assets - An
Amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of FAS No. 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early
application is permitted and companies must apply the standard prospectively.
The adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
8
NOTE 6 - BUSINESS SEGMENTS
The Company operates two reportable segments: community banking and investment
advisory and product services. The Company's community banking segment offers
services traditionally offered by full-service commercial banks, including
commercial mortgage, residential real estate, and consumer loan financing, as
well as commercial demand, individual demand, and time deposit services to its
customers. The investment advisory and product services segment offers fee based
investment management services and alternative investment products.
Selected segment information is included in the following tables:
Investment
Advisory and
Community Product
Banking Services Consolidated
-------------- -------------- --------------
For the quarter ended March 31, 2005:
Interest income $ 3,990,276 $ - $ 3,990,276
Interest expense 1,488,631 - 1,488,631
-------------- -------------- --------------
Net interest income 2,501,645 - 2,501,645
Provision for loan losses 62,000 - 62,000
-------------- -------------- --------------
Net interest income after provision for loan losses 2,439,645 - 2,439,645
Noninterest income 228,621 697,769 926,390
Noninterest expense 1,398,284 569,958 1,968,242
-------------- -------------- --------------
Income before income taxes 1,269,982 127,811 1,397,793
Income taxes 444,000 45,000 489,000
-------------- -------------- --------------
Net income $ 825,982 $ 82,811 $ 908,793
============== ============== ==============
Intersegment revenues (expenses) included above $ 136,048 $ (136,048) $ -
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 66,351 549 66,900
Total assets 305,722,950 1,184,759 306,907,709
9
Investment
Advisory and
Community Product
Banking Services Consolidated
-------------- -------------- --------------
For the quarter ended March 31, 2004:
Interest income $ 3,164,265 $ - $ 3,164,265
Interest expense 1,303,373 - 1,303,373
-------------- -------------- --------------
Net interest income 1,860,892 - 1,860,892
Provision for loan losses 110,000 - 110,000
-------------- -------------- --------------
Net interest income after provision for loan losses 1,750,892 - 1,750,892
Noninterest income 156,191 566,745 722,936
Noninterest expense 1,181,655 501,122 1,682,777
-------------- -------------- --------------
Income before income taxes 725,428 65,623 791,051
Income taxes 272,000 23,000 295,000
-------------- -------------- --------------
Net income $ 453,428 $ 42,623 $ 496,051
============== ============== ==============
Intersegment revenues (expenses) included above $ (119,048) $ 119,048 $ -
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 63,753 555 64,308
Total assets 265,028,907 1,185,875 266,214,782
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Those risks and uncertainties include, but are
not limited to, changes in interest rates, the ability to control costs and
expenses, and general economic conditions.
Overview
Nittany Financial Corp. ("Nittany") is a unitary thrift holding company
organized in 1997 for the purpose of establishing a de novo community bank in
State College, Pennsylvania. Nittany Bank (the "Bank") commenced operations as a
wholly-owned FDIC-insured federal savings bank subsidiary of Nittany on October
26, 1998. At March 31, 2005, the business operations of Nittany included three
operating subsidiaries (collectively defined as the "Company", unless the
context indicates otherwise), as follows:
10
o Nittany Bank commenced banking operations in October 1998 as a
federally-insured federal savings bank with two offices in State
College, Pennsylvania. Two additional offices were opened in State
College in August 2000 and January 2002. A lease was signed in June
2004 for a historic property in downtown Bellefonte, Pennsylvania, a
neighboring community to State College, which opened as the fifth
branch in February 2005. The Bank formed a Delaware investment company
called FTF Investments Inc. during the first quarter of 2004 to aid in
asset utilization.
o Nittany Asset Management, Inc. was formed in May 1999 primarily to
offer investment products and services to retail customers. The
subsidiary is headquartered at 2541 East College Avenue, State
College, Pennsylvania.
o On January 1, 2003, Nittany Financial Corp. acquired Vantage
Investment Advisors, LLC ("Vantage"). Vantage is a registered
investment advisor which currently manages investment assets of
approximately $300 million. This subsidiary is also headquartered at
2541 East College Avenue in State College.
Our retail business is conducted principally through Nittany Bank. Nittany Bank
provides a wide range of banking services with an emphasis on residential and
commercial real estate lending, consumer lending, commercial lending and retail
deposits. At March 31, 2005, we had consolidated assets of $307 million, loans
receivable (net of allowance for loan losses) of $242 million, deposits of $253
million, and stockholders' equity of $23 million. Net income for the quarter
ended March 31, 2005 increased $412,700 to $908,800 or $0.42 per diluted share
from $496,100 or $0.24 per diluted share for the same period in 2004. This
included an income tax expense of $489,000 for the 2005 quarter compared to
$295,000 for the 2004 quarter.
COMPARISON OF FINANCIAL CONDITION
Total assets increased $7,672,000 to $306,907,700 at March 31, 2005 from
$299,235,700 at December 31, 2004. Strong growth in residential and commercial
real estate loans resulted in an increase in net loans receivable of $6,723,100
which were funded mainly through Federal Home Loan Bank borrowings. Total assets
included $1.8 million of intangible assets from the acquisition of Vantage and
the Bank's original core deposits. These intangibles are not currently being
amortized.
Cash and cash equivalents decreased $5,852,300 at March 31, 2005 as compared to
December 31, 2004. This decrease resulted from growth in loan demand which
exceeded deposits during the quarter. Management believes that the liquidity
needs of the Company are satisfied by the current balance of cash and cash
equivalents, readily available access to traditional funding sources, FHLB short
term advances, and the portion of the investment and loan portfolios which
mature within one year. These sources of funds will enable the Company to meet
cash obligations and off-balance sheet commitments as they come due.
11
Investment securities available for sale decreased to $1,956,900 at March 31,
2005 from $2,084,200 at December 31, 2004 and investment securities held to
maturity increased to $42,817,600 at March 31, 2005 from $37,491,300 at December
31, 2004. The increase in the investment securities held to maturity portfolio
resulted primarily from the investment of cash held at Nittany Bank's FTF
Investments Inc. subsidiary.
Net loans receivable increased $6,723,100 to $242,151,700 at March 31, 2005 from
$235,428,600 at December 31, 2004. The increase in net loans receivable resulted
from the strong real estate market in the Company's market area, and low market
interest rates. At March 31, 2005, one to four family residential mortgage
balances grew by $5,160,300 to $161,883,300 from $156,723,000 at December 31,
2004 and commercial real estate loans grew by $3,432,900 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 March 31, 2005, the Company had additional commitments to fund loan
demand of $12,522,000 of which approximately $4,974,000 relates to commercial
customers.
At March 31, 2005, the Company's allowance for loan losses increased by $62,100
to $2,260,400 from $2,198,300 at December 31, 2004. The increase resulted from
an additional loan loss provision of $62,000 needed for the growth in loans
during the quarter which were offset by a few recoveries of previous
charge-offs.
The additions to the allowance for loan losses are based upon a careful analysis
by management of loan data. Because the Company has incurred very little loan
losses in its five-year history, management must base its determination upon
such factors as the Company's volume and the type of loans that it originates,
the amount and trends relating to its delinquent and non-performing loans,
regulatory policies, general economic conditions and other factors relating to
the collectibility of loans in its portfolio. Although the Company maintains its
allowance for loan losses at a level that it considers to be adequate to provide
for the inherent risk of loss in its loan portfolio at March 31, 2005, there can
be no assurance that additional losses will not be incurred in future periods.
The table below outlines the Company's past due loans as of March 31, 2005:
- ----------------- --------------------------------------------------------------------
> 90 Days Past Due - > 90 Days Past
Total Loan Due - Number Due - Balance
# of Loans Balance of Loans of Loans
- ----------------- --------------------------------------------------------------------
Personal Loans 363 6,046,600 1 9,700
- ----------------- --------------------------------------------------------------------
Credit
Line Loans 452 4,564,200 2 37,800
- ----------------- --------------------------------------------------------------------
Business Loans 188 13,107,200 3 181,300
- ----------------- --------------------------------------------------------------------
Real
Estate Loans 1,307 218,433,700 1 80,900
- ----------------- --------------------------------------------------------------------
Total 2,310 242,151,700 7 309,700
- ----------------- --------------------------------------------------------------------
12
Total deposits decreased by $5,527,700 to $252,743,200 at March 31, 2005 as
compared to $258,270,900 at December 31, 2004. The Nittany Savings deposit
account deposit is a competitively priced deposit account which comprises
approximately 59% of total deposits at March 31, 2005. During the quarter,
Management made the decision to not retain selected higher yielding deposits
during the rise in short term rates that did not compliment the overall funding
strategy of the Bank. Time deposits increased by $10,863,600 for the quarter,
mainly in the variable rate products tied to prime rate, which partially offset
the decline of $9,179,900 in the Nittany Savings account and $8,936,400 in money
market accounts. Non-interest bearing demand deposits increased to $11,956,700
at March 31, 2005 from $10,668,800 at December 31, 2004 which helped the net
interest margin. Short term borrowing from the Federal Home Loan Bank in
Pittsburgh, with very competitive market rates, were used to offset funding gaps
caused by the decline in deposits.
Stockholder's equity increased to $23,111,400 at March 31, 2005 from $17,666,300
at December 31, 2004 because of net income of $908,800, the stock offering of
180,000 shares at $26 per share during the quarter, and minor fluctuations in
the market value of available for sale securities.
Average Balance Sheet for March 31, 2005
The following tables set forth certain information relating to the Company's
quarterly average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from average daily balances.
The yield on earning assets and the net interest margin are presented on a fully
taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax
benefit of income on certain tax-exempt loans and investments using the federal
statutory tax rate of 34% for each period presented. The Company believes this
measure to be the preferred industry measurement of net interest income and
provides relevant comparison between taxable and non-taxable amounts.
13
a. Nittany Financial Quarterly Average Balance Sheet and Supplemental
Information:
For the period ended
------------------------------------------------------------------------
3/31/2005 3/31/2004
---------------------------------- -----------------------------------
(3) (3)
Average Annualized Average Average Annualized Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- ---------- ---------- ------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
Interest-earning assets:
Loans receivable $240,154 $3,528 5.88% $188,661 $2,758 5.85%
Investments securities 43,704 382 4.06% 48,753 391 3.73%
Interest-bearing dep. with other banks 12,341 80 2.59% 8,409 15 0.71%
-------- ----------- ------- -------- ---------- --------
Total interest-earning assets 296,199 3,990 5.47% 245,824 3,164 5.25%
----------- ----------
Noninterest-earning assets 7,086 8,782
Allowance for loan losses (2,218) (1,751)
-------- --------
Total assets $301,066 $252,854
Interest-bearing liabilities:
Interest - bearing demand deposits $22,822 48 0.85% $19,139 39 0.83%
Money market deposits 40,800 211 2.06% 34,466 184 2.13%
Savings deposits 154,466 769 1.99% 144,343 772 2.14%
Certificates of deposit 28,991 229 3.16% 21,637 165 3.05%
Advances from FHLB 22,584 232 4.10% 9,829 144 5.85%
-------- ----------- ------- -------- ---------- --------
Total interest-bearing liabilities 269,663 1,489 2.21% 229,414 1,304 2.27%
-------- ----------- -------- ---------- --------
Noninterest-bearing liabilities
Demand deposits 10,382 7,665
Other liabilities 1,256 633
Stockholders' equity 19,765 15,143
Total liabilities and stockholders' equity $301,066 $252,854
======== ========
Net interest income $2,501 $1,860
============ ==========
Interest rate spread (1) 3.26% 2.98%
Net yield on interest-earning assets (2) 3.46% 3.13%
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.84% 107.15%
- -------------------
(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.
RESULTS OF OPERATIONS
Net income was $908,800 for the three months ended March 31, 2005, an increase
of $412,700 as compared to the same period ended 2004. The increase is primarily
due to increases in net interest income and noninterest income of $640,700 and
$203,500, respectively, which were offset by increases in noninterest expense
and taxes. Basic and diluted earnings per share increased to $0.45 and $0.42 per
share, respectively for the three months period ended March 31, 2005 compared to
$0.26 and $0.24 per share, respectively, for the three month period ended March
31, 2004.
Net interest income for the three months ended March 31, 2005 was $2,501,600 as
compared to $1,860,900 for the same period ended 2004. Interest income increased
$826,000 for 2005 as compared to the prior year period and was influenced mainly
by increases in interest earned on loans receivable of $770,100. The increase in
interest income was the result of an increase of $50,375,000 in average
14
balances of interest-earning assets that primarily resulted from a $51,493,000
increase in the average balance of loans receivable. The yield on interest
earning assets increased to 5.47% for the three months ended March 31, 2005 from
5.25% for the same period ended 2004 due to increasing interest rates during the
quarter. There were significant increases in residential real estate lending
plus the yield on the loans receivable increased 3 basis points in 2005 as
compared to 2004.
Interest expense increased by $185,200 for the three months ended March 31, 2005
as compared to the prior year period and was influenced primarily by an increase
in interest expense on deposits as decreases in deposit balances were partially
offset by higher rates. This increase was primarily attributable to an increase
in the average balance of interest-bearing deposits of $27,494,000. The average
balance of savings deposit accounts increased by $10,123,000 but the average
rate decreased by 15 basis points when compared to the same period in 2004. The
cost of funds decreased to 2.21% for the three month period ended March 31, 2005
from 2.27% for the same period ended 2004 as a result of a increases in market
interest rate levels, a increase in the rates paid on deposits, and a greater
use of our Federal Home Loan Bank overnight borrowing capabilities.
As a result of an increase in the average yield on interest earning assets, the
Bank's quarterly net interest margin increased by 33 basis points to 3.46% from
3.13% at March 31, 2004, a period of interest rate volatility.
Total noninterest income for the three months ended March 31, 2005 increased
$203,500 as compared to the same period ended 2004. 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
$18,500 have increased as the number of accounts and the volume of transactions
have increased. Additionally, for the three-months ended March 31, 2005,
commissions and management fees from Vantage and Nittany Asset Management
increased by $131,000 over the same period of 2004.
Total noninterest expenses increased $285,400 for the three months ended March
31, 2005, as compared to the same period ended 2004. The increase in total
noninterest expenses for the current period was primarily related to the larger
organization that resulted from opening of the new branch in Bellefonte 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 $429,600 of independent investment
solicitors' fees for the quarter as compared to $377,500 for the same period in
2004 due to the growth in assets under management.
Income tax expense of $489,000 was recognized in the first quarter of 2005,
compared to $295,000 for the same period of 2004. The purchase of approximately
$15 million in high quality municipal bonds and the formation of a Delaware
investment company in 2004, have helped to reduce our effective tax rate.
15
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 March 31, 2005, cash and cash equivalents totaled $9.7 million
or 3% of total assets while investment securities classified as available for
sale totaled $1,956,900. 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 $997,600 for the three month period
ended March 31, 2005, generated principally from net income of $908,800 million.
Also contributing to operating activities was provision for loan losses and
depreciation, amortization, and accretion of $62,000 and $128,578, respectively.
Investing activities consist primarily of loan originations and repayments and
investment purchases and maturities. These cash usages primarily consisted of
loan originations of $6.8 million for the three months ended March 31, 2005, as
well as investment purchases of $9.1 million for the same time period. Partially
offsetting the usage of investment activities is $3.7 million of proceeds from
investment security maturities and repayments for the same time period.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, and proceeds from the sale of common stock.
During the three month period ending March 31, 2005, net cash provided by
financing activities totaled $6.4 million, principally derived from the stock
offering during the quarter (180,000 shares at $26 per share) plus short term
borrowings from the Federal Home Loan Bank of Pittsburgh. Also contributing to
this influx of cash was proceeds from short term borrowings of $7.4 million.
Nittany's primary source of capital has been common stock offerings and 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 March 31, 2005, 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
13.6%, 12.4%, 7.0% and 13.5%, 12.3%, 6.9%, respectively, at March 31, 2005.
16
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
------------------------------------------------
as of March 31, 2005, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-15(c) and 15d-15(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in the
------------------------------
Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) The following exhibits are included in this Report or
incorporated herein by reference:
3(i) Amended Articles of Incorporation of Nittany Financial Corp. *
3(ii) Bylaws of Nittany Financial Corp. *
4 Specimen Stock Certificate of Nittany Financial Corp. *
10.1 Employment Agreement between the Bank and David Z. Richards *
10.2 Nittany Financial Corp. 1998 Stock Option Plan **
10.3 Supplemental Executive Retirement Plan ***
31.1 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - David Z. Richards
17
31.2 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - Gary M. Bradley
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
99.1 Independent Accountants' Report
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-57277) declared effective
by the SEC on July 31, 1998.
** Incorporated by reference to the identically numbered exhibit to the
December 31, 1999 Form 10-KSB filed with the SEC on March 28, 2000.
*** Incorporated by reference to the identically numbered exhibit to the
December 31, 2003 Form 10-KSB filed with the SEC on March 30, 2004.
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and hereunto duly authorized.
Nittany Financial Corp.
Date: May 13, 2005 By: /s/ David Z. Richards
-------------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: May 13, 2005 By: /s/ Gary M. Bradley
-------------------------------------------
Gary M. Bradley
Vice President and Chief Accounting Officer
19