UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - QSB
- -----
X QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
For the quarterly period ended June 30, 2005
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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 August 12, 2005: 2,133,649
NITTANY FINANCIAL CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
June 30, 2005 and December 31, 2004
Consolidated Statement of Income (Unaudited)
for the Three and Six Months ended June 30, 2005 and 2004 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Six Months ended June 30, 2005 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 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 13
Item 3. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8 - K 22
SIGNATURES 23
CERTIFICATIONS
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2005 2004
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 1,128,445 $ 1,094,763
Interest-bearing deposits with other banks 10,328,376 14,487,813
------------- -------------
Cash and cash equivalents 11,456,821 15,582,576
Investment securities available for sale 1,836,667 2,084,223
Investment securities held to maturity (estimated
market value of $41,256,706 and $37,502,230) 41,317,729 37,491,341
Loans receivable (net of allowance for loan losses
of $2,377,483 and $2,198,235) 260,249,369 235,428,568
Premises and equipment 3,935,558 2,609,528
Federal Home Loan Bank stock 3,652,600 2,066,100
Intangible assets 1,763,231 1,763,231
Accrued interest and other assets 2,304,863 2,210,133
------------- -------------
TOTAL ASSETS $ 326,516,838 $ 299,235,700
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 12,377,899 $ 10,668,777
Interest-bearing demand 28,776,001 25,614,681
Money market 25,267,055 43,191,121
Savings 138,851,337 157,200,274
Time 36,807,492 21,596,027
------------- -------------
Total deposits 242,079,784 258,270,880
Short-term borrowings 54,437,108 14,838,231
Other borrowings 5,063,168 7,180,612
Accrued interest payable and other liabilities 1,331,451 1,279,653
------------- -------------
TOTAL LIABILITIES 302,911,511 281,569,376
------------- -------------
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, 2,113,738 and 1,930,794 issued and outstanding 211,374 193,079
Additional paid-in capital 18,873,040 14,339,979
Retained earnings 4,537,865 3,139,165
Accumulated other comprehensive loss (16,952) (5,899)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 23,605,327 17,666,324
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 326,516,838 $ 299,235,700
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three-months Ended June 30, Six-months Ended June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(unaudited) (unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,792,599 $3,009,369 $7,320,504 $5,767,209
Interest-bearing deposits with other banks 22,945 9,840 103,106 25,206
Investment securities 454,892 351,957 837,102 743,016
---------- ---------- ---------- ----------
Total interest and dividend income 4,270,436 3,371,166 8,260,712 6,535,431
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,254,228 1,146,837 2,511,171 2,306,537
Short-term borrowings 331,406 37,939 427,276 63,105
Other borrowings 54,905 100,598 190,723 219,105
---------- ---------- ---------- ----------
Total interest expense 1,640,539 1,285,374 3,129,170 2,588,747
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,629,897 2,085,792 5,131,542 3,946,684
Provision for loan losses 168,000 194,000 230,000 304,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,461,897 1,891,792 4,901,542 3,642,684
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service fees on deposit accounts 176,679 174,307 341,246 320,368
Asset management fees and commissions 725,882 592,471 1,423,652 1,159,216
Secondary market fees 75,675 39,119 118,918 47,387
Other 36,273 5,417 57,083 7,279
---------- ---------- ---------- ----------
Total noninterest income 1,014,509 811,314 1,940,899 1,534,250
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 674,347 745,230 1,455,188 1,437,995
Occupancy and equipment 199,562 177,793 376,436 354,129
Professional fees 63,743 51,349 126,764 94,798
Data processing fees 141,881 111,164 273,443 230,171
Supplies, printing, and postage 33,681 31,938 83,982 64,931
Advertising 51,771 37,723 114,353 78,128
ATM processing fees 36,906 34,982 73,358 69,853
Solicitor fees 443,584 361,331 873,157 738,837
Other 253,560 174,724 490,596 340,169
---------- ---------- ---------- ----------
Total noninterest expense 1,899,035 1,726,234 3,867,277 3,409,011
---------- ---------- ---------- ----------
Income before income taxes 1,577,371 976,872 2,975,164 1,767,923
Income taxes 559,030 339,000 1,048,030 634,000
---------- ---------- ---------- ----------
NET INCOME $1,018,341 $ 637,872 $1,927,134 $1,133,923
========== ========== ========== ==========
DIVIDENDS PER SHARE $ 0.25 N/A $ 0.25 N/A
EARNINGS PER SHARE
Basic $ 0.48 $ 0.33 $ 0.94 $ 0.59
Diluted 0.45 0.31 0.87 0.55
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,111,729 1,924,621 2,055,054 1,924,621
Diluted 2,267,408 2,080,803 2,211,381 2,077,516
See accompanying notes to 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 1,927,134 1,927,134 $ 1,927,134
Other comprehensive income:
Unrealized loss on available
for sale securities
net of tax benefit of $5,692 (11,053) (11,053) (11,053)
--------------
Comprehensive income $ 1,916,081
==============
Cash dividend ($0.25 per share) (528,434) (528,434)
Stock Offering - 180,000 shares
at $26 per share
(net of offering expenses) 18,000 4,516,163 4,534,163
Exercise of stock options 295 16,898 17,193
-------------- ------------- ------------- ------------- -------------
Balance, June 30, 2005 $ 211,374 $ 18,873,040 $ 4,537,865 $ (16,952) $ 23,605,327
============== ============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six-months ended June 30,
2005 2004
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 1,927,134 $ 1,133,923
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Provision for loan losses 230,000 304,000
Depreciation, amortization, and accretion, net 252,562 389,880
Increase in accrued interest receivable (88,736) (92,398)
Increase in accrued interest payable 293,758 3,577
Other, net (242,262) 276,734
------------ ------------
Net cash provided by operating activities 2,372,456 2,015,716
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases -- (80,881)
Proceeds from principal repayments and maturities 227,803 1,674,415
Investment securities held to maturity:
Purchases (10,128,113) (37,198,347)
Proceeds from principal repayments and maturities 6,180,205 34,272,474
Net increase in loans receivable (25,041,667) (31,168,568)
Purchase of FHLB stock (2,560,600) (597,400)
Proceeds from sale of FHLB stock 974,100 184,700
Purchase of premises and equipment (1,463,198) (81,209)
------------ ------------
Net cash used for investing activities (31,811,470) (32,994,816)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (16,191,096) 22,222,012
Net increase in short-term borrowings 39,598,877 4,681,745
Proceeds from other borrowings -- 1,350,000
Repayment of other borrowings (2,117,444) (110,391)
Proceeds from the sale of common stock 4,534,163 --
Proceeds from exercise of stock options 17,193 --
Cash dividends paid (528,434) --
Cash paid in lieu of fractional shares -- (3,472)
------------ ------------
Net cash provided by financing activities 25,313,259 28,139,894
------------ ------------
Increase in cash and cash equivalents (4,125,755) (2,839,206)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,582,576 14,953,286
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,456,821 $ 12,114,080
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 2,835,412 $ 2,585,170
Income taxes 1,180,000 659,000
See accompanying notes to 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 six months ended June 30, 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 Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income, as reported: $1,018,341 $ 637,872 $1,927,134 $1,133,923
Less proforma expense related
to stock options 13,855 29,747 27,710 59,494
---------- ---------- ---------- ----------
Proforma net income $1,004,486 $ 608,125 $1,899,424 $1,074,429
========== ========== ========== ==========
Basic net income per common share:
As reported $ 0.48 $ 0.33 $ 0.94 $ 0.59
Pro forma 0.48 0.32 0.92 0.56
Diluted net income per common share:
As reported $ 0.45 $ 0.31 $ 0.87 $ 0.55
Pro forma 0.44 0.29 0.86 0.52
7
NOTE 2 - EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. For the three months ended June 30, 2005 and 2004, the diluted
number of shares outstanding from employee stock options was 155,679 and
156,182, respectively. For the six months ended June 30, 2005 and 2004, the
diluted number of shares outstanding from employee stock options was 156,327 and
152,895, respectively.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the six months ended June 30,
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 June 30, 2005 and 2004, comprehensive income totaled $1,012,427 and
$619,879, respectively. For the six months ended June 30, 2004, comprehensive
income totaled $1,132,721.
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
$4,516,163, the net proceeds of the offering. The offering was completed in the
first quarter but a few of the expenses of the offering were paid in the second
quarter.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (FAS No. 123R). FAS No. 123R revised FAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. FAS No. 123R
will require compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
In April, the Securities and Exchange Commission adopted a new rule that amends
the compliance dates for 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. 123R 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. 123R on January 1, 2006 and is currently
evaluating the impact the adoption of the standard will have on the Company's
results of operations.
8
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of FAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide SAB No.
107 required disclosures upon adoption of FAS No. 123R on January 1, 2006 and is
currently evaluating the impact the adoption of the standard will have on the
Company's financial condition, results of operations, and cash flows.
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.
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. FAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
FAS No.154 improves the financial reporting because its requirements enhance the
consistency of financial reporting between periods.
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. Asset
management fees are primarily recognized as the services are performed. Asset
management fees are generally based on a percentage of the fair value of the
assets under management and performance fees are generally based on a percentage
of the returns on such assets.
9
Selected segment information is included in the following tables:
Investment
Advisory and
Community Product
Banking Services Consolidated
------------------- ------------------- ------------------
For the quarter ended June 30, 2005:
Interest income $ 4,270,436 $ - $ 4,270,436
Interest expense 1,640,539 - 1,640,539
------------------- ------------------- ------------------
Net interest income 2,629,897 - 2,629,897
Provision for loan losses 168,000 - 168,000
------------------- ------------------- ------------------
Net interest income after provision for loan losses 2,461,897 - 2,461,897
Noninterest income 288,252 726,257 1,014,509
Noninterest expense 1,322,993 576,042 1,899,035
------------------- ------------------- ------------------
Income before income taxes 1,427,156 150,215 1,577,371
Income taxes 559,030 - 559,030
------------------- ------------------- ------------------
Net income $ 868,126 $ 150,215 $ 1,018,341
=================== =================== ==================
Intersegment revenues (expenses) included above $ 136,795 $ (136,795) $ -
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 69,712 556 70,268
Total assets 325,324,175 1,192,663 326,516,838
10
Investment
Advisory and
Community Product
Banking Services Consolidated
------------------- ------------------- ------------------
For the quarter ended June 30, 2004:
Interest income $ 3,371,166 $ - $ 3,371,166
Interest expense 1,285,374 - 1,285,374
------------------- ------------------- ------------------
Net interest income 2,085,792 - 2,085,792
Provision for loan losses 194,000 - 194,000
------------------- ------------------- ------------------
Net interest income after provision for loan losses 1,891,792 - 1,891,792
Noninterest income 218,843 592,471 811,314
Noninterest expense 1,234,476 491,758 1,726,234
------------------- ------------------- ------------------
Income before income taxes 876,159 100,713 976,872
Income taxes 339,000 - 339,000
------------------- ------------------- ------------------
Net income $ 537,159 $ 100,713 $ 637,872
=================== =================== ==================
Intersegment revenues (expenses) included above $ 127,587 $ (127,587) $ -
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 65,663 556 66,219
Total assets 277,068,153 1,030,185 278,098,338
11
Investment
Advisory and
Community Product
Banking Services Consolidated
---------------------- --------------------- ---------------------
Year to Date - June 30, 2005
Interest income $ 8,260,712 $ 0 $ 8,260,712
Interest expense 3,129,170 0 3,129,170
---------------------- --------------------- ---------------------
Net interest income 5,131,542 0 5,131,542
Provision for loan losses 230,000 0 230,000
---------------------- --------------------- ---------------------
Net interest income after provision for loan losses 4,901,542 0 4,901,542
Noninterest income 516,873 1,424,026 1,940,899
Noninterest expense 2,721,277 1,146,000 3,867,277
---------------------- --------------------- ---------------------
Income before income taxes 2,697,138 278,026 2,975,164
Income taxes 1,048,030 0 1,048,030
---------------------- --------------------- ---------------------
Net income $ 1,649,108 $ 278,026 $ 1,927,134
====================== ===================== =====================
Intersegment revenues (expenses) included above $ 272,843 $ (272,843) $ 0
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 136,063 1,105 137,168
Total assets 325,324,175 1,192,663 326,516,838
12
Investment
Advisory and
Community Product
Banking Services Consolidated
--------------------- --------------------- ---------------------
Year to Date - June 30, 2004
Interest income $ 6,535,431 $ 0 $ 6,535,431
Interest expense 2,588,747 0 2,588,747
--------------------- --------------------- ---------------------
Net interest income 3,946,684 0 3,946,684
Provision for loan losses 304,000 0 304,000
--------------------- --------------------- ---------------------
Net interest income after provision for loan losses 3,642,684 0 3,642,684
Noninterest income 375,034 1,159,216 1,534,250
Noninterest expense 2,416,131 992,880 3,409,011
--------------------- --------------------- ---------------------
Income before income taxes 1,601,587 166,336 1,767,923
Income taxes 611,000 0 634,000
--------------------- --------------------- ---------------------
Net income $ 990,587 $ 143,336 $ 1,133,923
===================== ===================== =====================
Intersegment revenues (expenses) included
above $ 246,635 $ (246,635) $ 0
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 129,416 1,111 130,527
Total assets 277,068,153 1,030,185 278,098,338
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.
13
Overview
Nittany Financial Corp. ("Nittany") is a unitary thrift holding company
organized in 1997 for the purpose of establishing a de novo community bank in
State College, Pennsylvania. Nittany Bank (the "Bank") commenced operations as a
wholly-owned FDIC-insured federal savings bank subsidiary of Nittany on October
26, 1998. At June 30, 2005, the business operations of Nittany included three
operating subsidiaries (collectively defined as the "Company", unless the
context indicates otherwise), as follows:
o Nittany Bank commenced banking operations in October 1998 as a
federally-insured federal savings bank with headquarters State
College, Pennsylvania. The Bank currently has four offices currently
operating in State College plus an office which opened in February of
this year in a historic property in Bellefonte, Pennsylvania, a
neighboring community. The Bank formed a Delaware investment company
called FTF Investments Inc. during 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 In 2003, Nittany Financial Corp. acquired Vantage Investment Advisors,
LLC ("Vantage"). Vantage is a registered investment advisor which
currently manages investment assets of approximately $310 million.
This subsidiary is also headquartered at 2541 East College Avenue in
State College.
Our retail business is conducted principally through Nittany Bank. Nittany Bank
provides a wide range of banking services with an emphasis on residential and
commercial real estate lending, consumer lending, commercial lending and retail
deposits. At June 30, 2005, we had consolidated assets of $327 million, loans
receivable (net of allowance for loan losses) of $260 million, deposits of $242
million, and stockholders' equity of $24 million. Net income for the quarter
ended June 30, 2005 increased $380,400 to $1,018,300 or $0.45 per diluted share
from $637,900 or $0.31 per diluted share for the same period in 2004. This
included an income tax expense of $559,000 for the 2005 quarter compared to
$339,000 for the 2004 quarter.
COMPARISON OF FINANCIAL CONDITION
Total assets increased $27,281,100 to $326,516,800 at June 30, 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 $24,820,800
which were funded mainly through Federal Home Loan Bank borrowings.
Cash and cash equivalents decreased $4,125,800 at June 30, 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 whose
scheduled principal payments and maturities occur within one year. These sources
of funds will enable the Company to meet cash obligations and off-balance sheet
commitments as they come due.
14
Investment securities available for sale decreased to $1,836,700 at June 30,
2005 from $2,084,200 at December 31, 2004 and investment securities held to
maturity increased to $41,317,700 at June 30, 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 $24,820,800 to $260,249,400 at June 30, 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 June 30, 2005, one to four family residential mortgage
balances grew by $16,675,700 to $173,398,700 from $156,723,000 at December 31,
2004 and commercial real estate loans grew by $9,689,800 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 June 30, 2005, the Company had additional commitments to fund loan
demand of $12,557,000 of which approximately $4,823,000 relates to commercial
customers.
At June 30, 2005, the Company's allowance for loan losses increased by $179,200
to $2,377,500 from $2,198,300 at December 31, 2004. The increase resulted from
an additional loan loss provision of $230,000 needed for the growth in loans
during the quarter which were offset by a partial chargeoff of $52,000 and 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 June 30, 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 June 30, 2005:
- ----------------------------------------------------------------------------------------------------------------------
> 90 Days Past Due - > 90 Days Past Due -
Total Loan Number of Loans Balance of Loans
# of Loans Balance
- --------------------------------------------------------------------------------------------------------------------
Personal Loans 367 7,823,800 1 8,800
- --------------------------------------------------------------------------------------------------------------------
Credit
Line Loans 454 5,080,100 2 37,700
- --------------------------------------------------------------------------------------------------------------------
Business Loans 189 12,248,700 2 73,500
- --------------------------------------------------------------------------------------------------------------------
Real
Estate Loans 1,401 237,474,300 1 29,900
- --------------------------------------------------------------------------------------------------------------------
Total 2,411 262,626,900 6 149,900
- --------------------------------------------------------------------------------------------------------------------
15
Total deposits decreased by $16,191,100 to $242,079,800 at June 30, 2005 as
compared to $258,270,900 at December 31, 2004. The Nittany Savings deposit
account is a competitively priced deposit account which comprises approximately
57% of total deposits at June 30, 2005. During the quarter, a large escrow
account was distributed and also 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 $15,211,500 for the year, mainly in the variable rate products tied to prime
rate, which partially offset the decline of $18,348,900 in the Nittany Savings
account and $17,924,100 in money market accounts. Non-interest bearing demand
deposits increased to $12,377,900 at June 30, 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. It should be
noted that the number of new deposit accounts remained steady during the six
month and three month period.
Stockholder's equity increased to $23,605,300 at June 30, 2005 from $17,666,300
at December 31, 2004 because of net income of $1,927,100, 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.
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.
Average Balance Sheet for June 30, 2005 and 2004
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.
16
a. Nittany Financial Quarterly Average Balance Sheet and Supplemental
Information:
For the three months ended
----------------------------------------------------------------------------------------
6/30/05 6/30/04
-------------------------------------------------- ------------------------------------
(3) (3)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable $251,886 $3,793 6.02% $206,055 $3,009 5.84%
Investments securities 47,762 455 3.81% 47,951 352 3.47%
Interest-bearing dep. with other banks 9,200 23 1.00% 10,542 10 0.38%
-------------- --------- ---------- --------------- ---------- ---------
Total interest-earning assets 308,848 4,271 5.53% 264,548 3,371 5.19%
--------- ----------
Noninterest-earning assets 8,403 6,383
Allowance for loan losses (2,304) (1,876)
-------------- ---------------
Total assets $314,947 $269,056
============== ===============
Interest-bearing liabilities:
Interest - bearing demand deposits $25,157 52 0.83% $20,658 44 0.85%
Money market deposits 31,346 167 2.13% 35,573 181 2.04%
Savings deposits 141,885 721 2.03% 151,911 761 2.00%
Certificates of deposit 34,929 314 3.60% 21,671 160 2.95%
Borrowings 45,267 386 3.41% 13,467 139 4.13%
-------------- --------- ---------- --------------- ---------- ---------
Total interest-bearing liabilities 278,585 1,640 2.35% 243,281 1,285 2.11%
-------------- --------- --------------- ----------
Noninterest-bearing liabilities
Demand deposits 10,783 9,122
Other liabilities 1,743 808
Stockholders' equity 23,837 15,845
-------------- ---------------
Total liabilities and stockholders' equity $314,947 $269,056
============== ===============
Net interest income $2,631 $2,086
========= ==========
Interest rate spread (1) 3.18% 3.08%
Net yield on interest-earning assets (2) 3.41% 3.25%
Ratio of avg. interest-earning assets to
average interest-bearing liabilities 110.86% 108.74%
(1) Interest rate spread represents the difference between the avg. yield on
int. earning assets and the avg. cost of int. 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.
17
a. Nittany Financial Year to Date Average Balance Sheet and Supplemental
Information:
For the period ended
----------------------------------------------------------------------
6/30/05 6/30/04
------------------------------------ --------------------------------
(3) (3)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable $259,185 $7,321 5.65% $197,362 $5,767 5.84%
Investments securities 47,713 837 4.03% 48,352 743 3.60%
Interest-bearing dep. with other banks 9,345 103 2.20% 9,477 25 0.53%
--------- --------- ---------- --------- ---------- ---------
Total interest-earning assets 316,242 8,261 5.30% 255,190 6,535 5.22%
--------- ----------
Noninterest-earning assets 8,226 7,587
Allowance for loan losses (2,345) (1,814)
--------- ---------
Total assets $322,123 $260,963
========= =========
Interest-bearing liabilities:
Interest - bearing demand deposits $25,449 100 0.79% $19,900 84 0.84%
Money market deposits 26,978 378 2.80% 35,018 365 2.08%
Savings deposits 139,982 1,490 2.13% 148,129 1,532 2.07%
Certificates of deposit 36,118 543 3.01% 21,654 325 3.00%
Borrowings 56,467 618 2.19% 11,650 282 4.84%
--------- --------- ---------- --------- ---------- ---------
Total interest-bearing liabilities 284,994 3,129 2.20% 236,351 2,588 2.19%
--------- --------- --------- ----------
Noninterest-bearing liabilities
Demand deposits 11,610 8,394
Other liabilities 1,450 725
Stockholders' equity 24,069 15,494
--------- ---------
Total liabilities and stockholders' equity $322,123 $260,963
--------- ---------
Net interest income $5,132 $3,947
========= ==========
Interest rate spread (1) 3.11% 3.03%
Net yield on interest-earning assets (2) 3.32% 3.19%
Ratio of average int. earning assets to
average interest-bearing liabilities 110.96% 107.97%
(1) Interest rate spread represents the difference between the avg. yield on
int. earning assets and the avg. cost of int. 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 $1,018,300 for the three months ended June 30, 2005, an increase
of $380,400 as compared to the same period ended 2004. The increase is primarily
due to increases in net interest income and noninterest income of $544,100 and
$203,200 respectively, which were partially offset by increases in noninterest
expense and taxes. Basic and diluted earnings per share increased to $0.48 and
$0.45 per share, respectively for the quarter ended June 30, 2005 compared to
$0.33 and $0.31 per share, respectively, for the quarter ended June 30, 2004.
Net income was $1,927,100 for the six months ended June 30, 2005, an increase of
$793,200 as compared to the same period ended 2004. The increase is primarily
due to increases in net interest income and noninterest income of $1,184,800 and
$406,600, respectively, which were offset by increases in noninterest expense
and taxes. Basic and diluted earnings per share increased to $0.94 and $0.87 per
share, respectively for the six months period ended June 30, 2005 compared to
$0.59 and $0.55 per share, respectively, for the six month period ended June 30,
2004.
18
Net interest income for the three months ended June 30, 2005 was $2,629,900 as
compared to $2,085,800 for the same period ended 2004. Interest income increased
$899,200 for 2005 as compared to the prior year period and was influenced mainly
by increases in interest earned on loans receivable of $783,200. The increase in
interest income was the result of an increase of $44,300,000 in average balances
of interest-earning assets that primarily resulted from a $45,831,000 increase
in the average balance of loans receivable. The yield on interest earning assets
increased to 5.53% for the three months ended June 30, 2005 from 5.19% for the
same period ended 2004 due to increasing interest rates during the quarter.
There were significant increases in residential real estate lending although the
yield on the loans receivable increased 18 basis points in 2005 as compared to
2004. Net interest income for the six months ended June 30, 2005 was $5,131,500
as compared to $3,946,700 for the same period ended 2004. Interest income
increased $1,725,300 for 2005 as compared to the prior year period and was
influenced mainly by increases in interest earned on loans receivable of
$1,553,300.
Interest expense increased by only $355,100 for the three months ended June 30,
2005 as compared to the prior year period as decreases in the Nittany Savings
balances were essentially offset by higher rates and balances in overnight
borrowings. The average rate of interest-bearing liabilities (i.e. cost of
funds) increased by 24 basis points as compared to the same period in year 2004.
The average balance of savings deposit, the Bank's flagship account, decreased
by $10,026,000 while rates held steady. The Bank used the preferential overnight
borrowing rates offered by the Federal Home Loan Bank to offset funding
differences. The average balance in advances from the Federal Home Loan Bank
increased significantly from $13,467,000 in the second quarter of 2004 to
$45,267,000 in the current quarter. Interest expense increased by $540,400 for
the six months ended June 30, 2005 as compared to the prior year period as
higher rates and additional borrowings were partially offset by decreases in
average deposit balances.
As a result of an increase in the average yield on interest earning assets, the
Bank's quarterly net interest margin for the quarter increased by 16 basis
points to 3.41% from 3.25% at June 30, 2004, a period of continued flattening in
the yield curve.
Total noninterest income for the three months ended June 30, 2005 increased
$203,200 as compared to the same period ended 2004. Noninterest income items are
primarily comprised of service charges and fees on deposit account activity,
secondary market fees, overdraft privilege fees, and fee income derived from
asset management services. For the three month and six month periods ended June
30, 2005, commissions and management fees from Vantage and Nittany Asset
Management increased by $133,400 and $264,400 respectively, over the same
periods of 2004.
Total noninterest expenses increased $172,800 for the three months ended June
30, 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 during
the last quarter, the marketing efforts to increase visibility within the
Company's market area, performance bonuses given to employees, and data
processing expenses. For the six months ended June 30, 2005, noninterest
expenses increased $458,300 as compared to the same period ended 2004. This
increase also relates primarily to the larger organization, marketing efforts,
and data processing expenses. A portion of the increase for the quarter and year
to date also related to the fact that Vantage paid $443,600 of independent
investment solicitors' fees for the quarter as compared to $361,300 for the same
period in 2004 and $873,200 for the six month period as compared to $738,800 for
the same six month period in 2004. These increases are due to the sustained
growth in assets under management by Vantage.
19
Income tax expense of $559,000 was recognized in the quarter ended June 30, 2005
compared to $339,000 for the same period of 2004 as the Bank's effective tax
rate remained steady at approximately 35%. The Bank holds approximately $15
million in high quality municipal bonds and has a Delaware investment company
subsidiary which holds approximately $43 million in investments and deposits.
These strategies have helped to maintain 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 June 30, 2005, cash and cash equivalents totaled $11,456,800
million or 4% of total assets while investment securities classified as
available for sale totaled $1,836,700. The Bank's borrowings of $45,267,000 of
FHLB advances are substantially higher than historic levels which increases
interest rate risk. Management, however, 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, and the portion of the
investment and loan portfolios that mature within one year.
Operating activities provided net cash of $2,372,500 for the six month period
ended June 30, 2005, generated principally from net income of $1,927,100. Also
contributing to operating activities was provision for loan losses and
depreciation, amortization, and accretion of $230,000 and $252,600,
respectively.
Investing activities consist primarily of loan originations and repayments and
investment purchases and maturities. These cash usages primarily consisted of
loan originations of $25,041,700 for the six months ended June 30, 2005, as well
as investment purchases of $10,128,100 for the same time period. Partially
offsetting the usage of investment activities is $6,408,000 of proceeds from
investment security maturities and repayments for the same time period. The Bank
also purchased a former Dunkin Donuts building which was adjacent to the East
College Avenue office for approximately $850,000 for future expansion.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, and proceeds from the sale of common stock.
During the six month period ending June 30, 2005, net cash provided by financing
activities totaled $25,313,300, principally derived from the stock offering
during the quarter (180,000 shares at $26 per share) and the proceeds from short
term borrowings from the Federal Home Loan Bank of Pittsburgh of $39,598,900.
20
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 June 30, 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
13.0%, 11.8%, 6.7% and 12.9%, 11.6%, 6.6%, respectively, at June 30, 2005.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
------------------------------------------------
as of June 30, 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
The following represents the results of matters submitted to a vote
of the stockholders at the annual meeting held on May 20, 2005:
Election of a Director for term to expire in 2009:
Donald J. Musso elected by the following vote:
For: 1,585,739
Votes Withheld: 9,029
S.R. Snodgrass A.C. was selected as the Company's independent auditors
for the fiscal year 2006 by the following vote:
For: 1,594,053
Against: 715
Votes Withheld: 0
Item 5. Other Information
None
21
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
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.
22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and hereunto duly authorized.
Nittany Financial Corp.
Date: August 13, 2005 By: /s/ David Z. Richards
-------------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: August 13, 2005 By: /s/ Gary M. Bradley
-------------------------------------------
Gary M. Bradley
Vice President and Chief Accounting Officer
23