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 September 30, 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 November 12, 2005: 2,270,442
NITTANY FINANCIAL CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
September 30, 2005 and December 31, 2004
Consolidated Statement of Income (Unaudited)
for the Three and Nine Months ended September 30,
2005 and 2004 4
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) for the Nine Months ended September 30, 2005 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 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. Changes in Securities and Small Business Issuer
Purchases of Equity Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits 22
SIGNATURES 23
CERTIFICATIONS
2
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2005 2004
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 1,311,483 $ 1,094,763
Interest-bearing deposits with other banks 15,494,167 14,487,813
------------- -------------
Cash and cash equivalents 16,805,650 15,582,576
Investment securities available for sale 1,717,756 2,084,223
Investment securities held to maturity (estimated
market value of $38,569,087 and $37,502,230) 38,873,162 37,491,341
Loans receivable (net of allowance for loan losses
of $2,469,213 and $2,198,235) 270,523,560 235,428,568
Premises and equipment 3,922,400 2,609,528
Federal Home Loan Bank stock 4,309,900 2,066,100
Intangible assets 1,763,231 1,763,231
Accrued interest and other assets 2,905,308 2,210,133
------------- -------------
TOTAL ASSETS $ 340,820,967 $ 299,235,700
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 12,551,749 $ 10,668,777
Interest-bearing demand 28,387,104 25,614,681
Money market 35,439,254 43,191,121
Savings 122,451,170 157,200,274
Time 40,251,138 21,596,027
------------- -------------
Total deposits 239,080,415 258,270,880
Short-term borrowings 69,232,473 14,838,231
Other borrowings 5,003,068 7,180,612
Accrued interest payable and other liabilities 1,316,354 1,279,653
------------- -------------
TOTAL LIABILITIES 314,632,310 281,569,376
------------- -------------
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, 2,270,442 and 1,930,794 issued and outstanding 227,044 193,079
Additional paid-in capital 20,378,456 14,339,979
Retained earnings 5,594,647 3,139,165
Accumulated other comprehensive loss (11,490) (5,899)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 26,188,657 17,666,324
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,820,967 $ 299,235,700
============= =============
See the accompanying notes to the unaudited financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
Three months Ended Nine months Ended
September 30, September 30,
2005 2004 2005 2004
----------- ---------- ----------- -----------
(unaudited) (unaudited)
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 4,090,536 $3,266,905 $11,411,040 $ 9,034,114
Interest-bearing deposits with other banks 65,007 24,473 168,113 49,679
Investment securities 414,472 371,767 1,251,574 1,114,783
----------- ---------- ----------- -----------
Total interest and dividend income 4,570,015 3,663,145 12,830,727 10,198,576
----------- ---------- ----------- -----------
INTEREST EXPENSE
Deposits 1,278,195 1,185,689 3,789,366 3,492,226
Short-term borrowings 602,991 1,932 1,030,267 65,037
Other borrowings 76,633 176,615 267,356 395,720
----------- ---------- ----------- -----------
Total interest expense 1,957,819 1,364,236 5,086,989 3,952,983
----------- ---------- ----------- -----------
NET INTEREST INCOME 2,612,196 2,298,909 7,743,738 6,245,593
Provision for loan losses 76,000 138,000 306,000 442,000
----------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,536,196 2,160,909 7,437,738 5,803,593
----------- ---------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts 180,384 177,863 521,630 498,231
Investment security gain -- 32,707 -- 32,707
Asset management fees and commissions 750,322 614,209 2,173,974 1,773,425
Secondary market fees 82,047 17,758 200,965 65,145
Other 32,176 8,951 89,259 16,230
----------- ---------- ----------- -----------
Total noninterest income 1,044,929 851,488 2,985,828 2,385,738
----------- ---------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 718,847 730,611 2,174,035 2,168,606
Occupancy and equipment 213,561 186,363 589,997 540,492
Professional fees 50,767 49,290 177,531 144,088
Data processing fees 147,513 121,146 420,956 351,317
Supplies, printing, and postage 42,487 39,084 126,469 104,015
Advertising 36,967 37,721 151,320 115,849
ATM processing fees 41,425 36,191 114,783 106,044
Solicitor fees 463,173 381,639 1,336,330 1,120,476
Other 246,603 205,537 737,199 545,706
----------- ---------- ----------- -----------
Total noninterest expense 1,961,343 1,787,582 5,828,620 5,196,593
----------- ---------- ----------- -----------
Income before income taxes 1,619,782 1,224,815 4,594,946 2,992,738
Income taxes 563,000 427,000 1,611,030 1,061,000
----------- ---------- ----------- -----------
NET INCOME $ 1,056,782 $ 797,815 $ 2,983,916 $ 1,931,738
=========== ========== =========== ===========
DIVIDENDS PER SHARE $ 0.25 N/A $ 0.25 N/A
EARNINGS PER SHARE
Basic $ 0.47 0.41 $ 1.41 1.00
Diluted 0.45 0.38 1.32 0.93
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 2,193,701 1,924,621 2,101,778 1,924,621
Diluted 2,304,330 2,080,438 2,242,872 2,078,490
See the accompanying notes to the unaudited 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 2,983,916 2,983,916 $ 2,983,916
Other comprehensive income:
Unrealized loss on available
for sale securities
net of tax benefit of $2,880 (5,591) (5,591) (5,591)
--------------
Comprehensive income $ 2,978,325
==============
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 15,965 1,522,314 1,538,279
-------------- ------------- ------------- ------------- -------------
Balance, September 30, 2005 $ 227,044 $ 20,378,456 $ 5,594,647 $ (11,490) $ 26,188,657
============== ============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30,
2005 2004
------------ ------------
(unaudited)
OPERATING ACTIVITIES
Net income $ 2,983,916 $ 1,931,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 306,000 442,000
Depreciation, amortization, and accretion, net 371,017 540,818
Investment security gain -- (32,707)
Increase in accrued interest receivable (159,687) (105,747)
Decrease in accrued interest payable 510,749 (34,839)
Decrease in taxes payable 465,174 51,757
Other, net (1,471,832) 75,762
------------ ------------
Net cash provided by operating activities 3,005,337 2,868,782
------------ ------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases -- (80,881)
Proceeds from sale -- 52,707
Proceeds from principal repayments and maturities 353,403 3,353,469
Investment securities held to maturity:
Purchases (10,128,113) (42,268,480)
Proceeds from principal repayments and maturities 8,573,725 36,262,161
Net increase in loans receivable (35,386,939) (44,150,543)
Purchase of FHLB stock (3,844,600) (912,000)
Redemption of FHLB stock 1,600,800 --
Purchase of premises and equipment (1,520,781) (147,330)
------------ ------------
Net cash used for investing activities (40,352,505) (47,890,897)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (19,190,465) 25,665,981
Net increase in short-term borrowings 54,394,242 4,427,735
Proceeds from other borrowings -- 14,575,000
Repayment of other borrowings (2,177,544) (166,881)
Proceeds from the sale of common stock 4,534,163 --
Proceeds from exercise of stock options 1,538,279 --
Cash dividends paid (528,434) --
Cash paid in lieu of fractional shares -- (3,472)
------------ ------------
Net cash provided by financing activities 38,570,241 44,498,363
------------ ------------
Increase (decrease) in cash and cash equivalents 1,223,073 (523,752)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,582,576 14,953,286
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,805,649 $ 14,429,534
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 4,576,240 $ 3,987,822
Income taxes 1,730,000 1,151,500
See the accompanying notes to the unaudited 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------------------ ----------------- ----------------- -----------------
Net income, as reported: $ 1,056,782 $ 797,815 $ 2,983,916 $ 1,931,738
Less proforma expense related
to stock options 13,644 29,747 41,354 89,241
---------------- -------------- -------------- --------------
Proforma net income $ 1,043,138 $ 768,068 $ 2,942,562 $ 1,842,497
================ ============== ============== ==============
Basic net income per common share:
As reported $ 0.47 $ 0.41 $ 1.41 $ 1.00
Pro forma 0.48 0.40 1.40 0.96
Diluted net income per common share:
As reported $ 0.45 $ 0.38 $ 1.32 $ 0.93
Pro forma 0.45 0.37 1.31 0.89
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 September 30, 2005 and 2004, the diluted
number of shares outstanding from employee stock options was 110,629 and
155,817, respectively. For the nine months ended September 30, 2005 and 2004,
the diluted number of shares outstanding from employee stock options was 141,094
and 153,869, respectively.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the nine months ended September
30, 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 September 30, 2005 and 2004, comprehensive income totaled
$1,062,244 and $802,587, respectively. For the nine months ended September 30,
2004, comprehensive income totaled $1,935,311.
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. The provisions of FAS No.
154 are effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005.
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 September 30, 2005:
Interest income $ 4,570,015 $ -- $ 4,570,015
Interest expense 1,957,819 -- 1,957,819
---------------- -------------- ---------------
Net interest income 2,612,196 -- 2,612,196
Provision for loan losses 76,000 -- 76,000
---------------- -------------- ---------------
Net interest income after provision for loan losses 2,536,196 -- 2,536,196
Noninterest income 308,547 736,382 1,044,929
Noninterest expense 1,369,336 592,007 1,961,343
---------------- -------------- ---------------
Income before income taxes 1,475,407 144,375 1,619,782
Income taxes 563,000 -- 563,000
---------------- -------------- ---------------
Net income $ 912,407 $ 144,375 $ 1,056,782
================ ============== ===============
Intersegment revenues (expenses) included above $ 128,273 $ (128,273) $ --
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 70,179 561 70,740
Total assets 339,963,771 857,197 340,820,967
10
Investment
Advisory and
Community Product
Banking Services Consolidated
---------------- -------------- ---------------
For the quarter ended September 30, 2004:
Interest income $ 3,663,145 $ -- $ 3,663,145
Interest expense 1,364,236 -- 1,364,236
---------------- -------------- ---------------
Net interest income 2,298,909 -- 2,298,909
Provision for loan losses 138,000 -- 138,000
---------------- -------------- ---------------
Net interest income after provision for loan losses 2,160,909 -- 2,160,909
Noninterest income 254,780 596,708 851,488
Noninterest expense 1,291,381 496,201 1,787,582
---------------- -------------- ---------------
Income before income taxes 1,124,308 100,507 1,224,815
Income taxes 427,000 -- 427,000
---------------- -------------- ---------------
Net income $ 697,308 $ 100,507 $ 797,815
================ ============== ===============
Intersegment revenues (expenses) included above $ 114,000 $ (114,000) $ -
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 67,785 562 68,347
Total assets 293,910,064 1,245,192 295,155,256
11
Investment
Advisory and
Community Product
Banking Services Consolidated
---------------- --------------- ---------------
Year to Date - September 30, 2005
Interest income $ 12,830,727 $ 0 $ 12,830,727
Interest expense 5,086,989 0 5,086,989
---------------- --------------- ---------------
Net interest income 7,743,738 0 7,743,738
Provision for loan losses 306,000 0 306,000
---------------- --------------- ---------------
Net interest income after provision for loan losses 7,437,738 0 7,437,738
Noninterest income 859,673 2,126,155 2,985,828
Noninterest expense 4,110,160 1,718,460 5,828,620
---------------- --------------- ---------------
Income before income taxes 4,187,251 407,695 4,594,946
Income taxes 1,611,000 30 1,611,030
---------------- --------------- ----------------
Net income $ 2,576,251 $ 407,665 $ 2,983,916
================ =============== ================
Intersegment revenues (expenses) included above $ 411,138 $ (411,138) $ 0
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 206,242 1,666 207,908
Total assets 339,608,211 1,212,756 340,820,967
12
Investment
Advisory and
Community Product
Banking Services Consolidated
---------------- --------------- ---------------
Year to Date - September 30, 2004
Interest income $ 10,198,576 $ 0 $ 10,198,576
Interest expense 3,952,983 0 3,952,983
---------------- --------------- ---------------
Net interest income 6,245,593 0 6,245,593
Provision for loan losses 442,000 0 442,000
---------------- --------------- ---------------
Net interest income after provision for loan losses 5,803,593 0 5,803,593
Noninterest income 668,571 1,717,167 2,385,738
Noninterest expense 3,738,445 1,458,148 5,196,593
---------------- --------------- ---------------
Income before income taxes 2,733,719 259,019 2,992,738
Income taxes 1,061,000 0 1,061,000
---------------- --------------- ---------------
Net income $ 1,672,719 $ 259,019 $ 1,931,738
================ =============== ===============
Intersegment revenues (expenses) included above 373,678 $ (373,678) $ 0
Goodwill 799,217 964,014 1,763,231
Depreciation and amortization expense 197,201 1,673 198,874
Total assets 293,910,063 1,245,192 295,155,256
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" or the "Company") is a unitary thrift holding
company organized in 1997 for the purpose of establishing a de novo community
bank in State College, Pennsylvania. Nittany Bank (the "Bank") commenced
operations as a wholly-owned FDIC-insured federal savings bank subsidiary of
Nittany on October 26, 1998. At September 30, 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 $325 million.
This subsidiary is also headquartered at 2541 East College Avenue in
State College.
Our retail business is conducted principally through Nittany Bank. Nittany Bank
provides a wide range of banking services with an emphasis on residential and
commercial real estate lending, consumer lending, commercial lending and retail
deposits. At September 30, 2005, we had consolidated assets of $341 million,
loans receivable (net of allowance for loan losses) of $271 million, deposits of
$239 million, and stockholders' equity of $26 million. Net income for the
quarter ended September 30, 2005 increased $259,000 to $1,057,100 or $0.45 per
diluted share from $798,000 or $0.38 per diluted share for the same period in
2004. This included an income tax expense of $563,000 for the 2005 quarter
compared to $427,000 for the 2004 quarter.
On September 6, 2005, the Company and National Penn Bancshares, Inc. ("National
Penn") of Boyertown, PA entered into a merger agreement pursuant to which the
Company would be acquired by National Penn. Under the terms of the merger
agreement, shareholders of the Company will be entitled to receive in exchange
for each of their shares of Company common stock, (i) cash in the amount of
$42.43, (ii) 1.975 shares of National Penn common stock (subject to adjustment
based upon the average closing price of National Penn common stock for a ten
trading day period prior to the Company's meeting of shareholders at which the
merger agreement will be considered), or (iii) a combination thereof.
Shareholders will be entitled to elect what form of consideration to receive
subject to overall limits that provide that no more than 30% of the outstanding
shares of Company common stock may be exchanged for cash. Completion of the
merger is subject to receipt of all required regulatory approvals and approval
of the merger agreement by the shareholders of the Company.
14
COMPARISON OF FINANCIAL CONDITION
Total assets increased $41,585,300 to $340,821,000 at September 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 $35,095,000
which were funded mainly through Federal Home Loan Bank borrowings.
Cash and cash equivalents decreased $1,223,100 at September 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.
Investment securities available for sale decreased to $1,717,800 at September
30, 2005 from $2,084,200 at December 31, 2004 and investment securities held to
maturity increased to $38,873,000 at September 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 $35,095,000 to $270,523,600 at September 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 September 30, 2005, one to four family residential
mortgage balances grew by $20,702,400 to $177,425,400 from $156,723,000 at
December 31, 2004 and commercial real estate loans grew by $15,872,200 during
the same time period. Management attributes the increases in lending balances to
continued customer referrals, the economic climate within the market area, and
competitive rates. As of September 30, 2005, the Company had additional
commitments to fund loan demand of $16,352,000 of which approximately $8,544,000
relates to commercial customers.
At September 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 $306,00 needed for the growth
in loans during the quarter which were offset by two chargeoffs totaling $55,000
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 September 30, 2005, there
can be no assurance that additional losses will not be incurred in future
periods.
15
The table below outlines the Company's past due loans as of September 30, 2005:
- ----------------------------------------------------------------------------------------------------------------------
> 90 Days Past > 90 Days Past
Total Loan Due - Number Due - Balance
# of Loans Balance of Loans of Loans
- ----------------------------------------------------------------------------------------------------------------------
Personal Loans 382 $8,531,600 2 $18,400
- ----------------------------------------------------------------------------------------------------------------------
Credit
Line Loans 457 4,813,000 4 43,000
- ----------------------------------------------------------------------------------------------------------------------
Business Loans 189 11,268,300 8 143,200
- ----------------------------------------------------------------------------------------------------------------------
Real
Estate Loans 1,441 248,288,100 2 386,800
- ----------------------------------------------------------------------------------------------------------------------
Total 2,469 $272,901,000 16 $591,400
- ----------------------------------------------------------------------------------------------------------------------
Total deposits decreased by $19,190,500 to $239,080,400 at September 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
51% of total deposits at September 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 complement the overall funding strategy of the Bank. Time deposits increased
by $18,655,100 for the year, mainly in the variable rate products tied to prime
rate, which partially offset the decline of $34,749,100 in the Nittany Savings
account and $7,751,900 in money market accounts. Non-interest bearing demand
deposits increased to $1,882,980 at September 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 nine month and three month period.
Stockholder's equity increased to $26,188,700 at September 30, 2005 from
$17,666,300 at December 31, 2004 because of net income of $2,983,900, the stock
offering of 180,000 shares at $26 per share during the first 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 September 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.
16
The yield on earning assets and the net interest margin are presented on a fully
taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax
benefit of income on certain tax-exempt loans and investments using the federal
statutory tax rate of 34% for each period presented. The Company believes this
measure to be the preferred industry measurement of net interest income and
provides relevant comparison between taxable and non-taxable amounts.
a. Nittany Financial Quarterly Average Balance Sheet and Supplemental
Information:
For the three months ended
----------------------------------------------------------------------------------
9/30/2005 9/30/2004
--------------------------------------- ----------------------------------
(3) (3)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable $269,320 $4,090 6.07% $222,148 $3,267 5.88%
Investments securities 46,494 414 4.09% 46,768 372 4.27%
Interest-bearing dep. with other banks 12,137 65 2.14% 10,355 24 0.93%
-------- ------ ---------- -------- ------ ---------
Total interest-earning assets 327,951 4,569 5.65% 279,271 3,663 5.43%
------ ------
Noninterest-earning assets 8,737 6,413
Allowance for loan losses (2,424) (2,029)
-------- --------
Total assets $334,264 $283,655
======== ========
Interest-bearing liabilities:
Interest - bearing demand deposits $ 25,276 52 0.82% $ 21,652 47 0.87%
Money market deposits 23,061 159 2.76% 37,679 196 2.08%
Savings deposits 134,049 715 2.13% 155,610 790 2.03%
Certificates of deposit 40,062 352 3.51% 21,051 153 2.91%
Borrowings 68,577 680 3.97% 20,366 179 3.52%
-------- ------ ---------- -------- ------ ---------
Total interest-bearing liabilities 291,025 1,958 2.69% 256,358 1,365 2.13%
-------- ------ -------- ------
Noninterest-bearing liabilities
Demand deposits 12,314 10,022
Other liabilities 1,347 705
Stockholders' equity 24,839 16,569
-------- --------
Total liabilities and stockholders' equity $329,526 $283,655
======== ========
Net interest income $2,611 $2,298
====== ======
Interest rate spread (1) 2.96% 3.30%
Net yield on interest-earning assets (2) 3.26% 3.47%
Ratio of avg. interest-earning assets to
average interest-bearing liabilities 112.69% 108.94%
(1) Interest rate spread is the difference between the avg yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(2) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(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
---------------------------------------------------------------------------------
9/30/2005 9/30/2004
--------------------------------------- ---------------------------------
(3) (3)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans recievable $253,886 $11,411 5.99% $205,669 $ 9,034 5.86%
Investments securities 45,925 1,252 4.17% 47,818 1,115 3.64%
Interest-bearing dep. with other banks 11,296 168 1.98% 9,776 50 0.68%
-------- ------- -------- -------- ------- ---------
Total interest-earning assets 311,106 12,831 5.58% 263,264 10,199 5.26%
------- -------
Noninterest-earning assets 8,082 7,193
Allowance for loan losses (2,316) (1,886)
-------- --------
Total assets $316,872 $268,570
======== ========
Interest-bearing liabilities:
Interest - bearing demand deposits $ 24,186 152 0.84% $ 20,489 131 0.85%
Money market deposits 31,920 537 2.24% 35,910 560 2.08%
Savings deposits 143,417 2,205 2.05% 150,639 2,323 2.06%
Certificates of deposit 35,561 895 3.36% 21,454 478 2.97%
Borrowings 44,766 1,298 3.87% 14,566 461 4.22%
-------- ------- ---------- -------- ------- ---------
Total interest-bearing liabilities 279,850 5,087 2.42% 243,059 3,953 2.17%
-------- ------- -------- -------
Noninterest-bearing liabilities
Demand deposits 11,169 8,939
Other liabilities 1,450 719
Stockholders' equity 22,829 15,854
-------- --------
Total liabilities and stockholders' equity $315,297 $268,570
======== ========
Net interest income $ 7,744 $ 6,246
======= =======
Interest rate spread (1) 3.16% 3.09%
Net yield on interest-earning assets (2) 3.40% 3.26%
Ratio of avg. interest-earning assets to
average interest-bearing liabilities 111.17% 108.31%
(1) Interest rate spread is the difference between the average yield on
int-earning assets and the average 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 $1,056,800 for the three months ended September 30, 2005, an
increase of $258,970 as compared to the same period ended 2004. The increase is
primarily due to increases in net interest income and noninterest income of
$313,300 and $1,056,800 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 September 30,
2005 compared to $0.33 and $0.31 per share, respectively, for the quarter ended
September 30, 2004. Net income was $2,983,900 for the nine months ended
September 30, 2005, an increase of $1,052,200 as compared to the same period
ended 2004. The increase is primarily due to increases in net interest income
and noninterest income of $1,498,100 and $600,100, respectively, which were
offset by increases in noninterest expense and taxes. Basic and diluted earnings
per share decreased to $0.94 and $0.87 per share, respectively for the nine
months period ended September 30, 2005 compared to $1.00 and $0.93 per share,
respectively, for the nine month period ended September 30, 2004.
18
Net interest income for the three months ended September 30, 2005 was $2,612,200
as compared to $2,298,900 for the same period ended 2004. Interest income
increased $906,900 for 2005 as compared to the prior year period and was
influenced mainly by increases in interest earned on loans receivable of
$823,600. The increase in interest income was the result of an increase of
$48,680,000 in average balances of interest-earning assets that primarily
resulted from a $47,172,000 increase in the average balance of loans receivable.
The yield on interest earning assets increased to 5.58% for the three months
ended September 30, 2005 from 5.43% 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 20 basis points in 2005 as compared to 2004. Net interest income for
the nine months ended September 30, 2005 was $7,743,700 as compared to
$6,245,600 for the same period ended 2004. Interest income increased $2,632,200
for 2005 as compared to the prior year period and was influenced mainly by
increases in interest earned on loans receivable of $2,376,900.
Interest expense increased by $593,600 for the three months ended September 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 56 basis points as compared to the same period in year 2004.
The average balance of savings deposit, the Bank's flagship account, decreased
by $21,561,000 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 $20,366,000 in the third quarter of 2004 to
$68,577,000 in the current quarter. Interest expense increased by $1,134,000 for
the nine months ended September 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 cost of interest bearing liabilities,
the Bank's quarterly net interest margin decreased by 21 basis points to 3.26%
from 3.47% at September 30, 2004, a period of continued flattening in the yield
curve.
Total noninterest income for the three months ended September 30, 2005 increased
$193,400 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 nine month periods ended
September 30, 2005, commissions and management fees from Vantage and Nittany
Asset Management increased by $136,100 and $400,500 respectively, over the same
periods of 2004.
Total noninterest expenses increased $173,800 for the three months ended
September 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 nine months ended September 30, 2005, noninterest
expenses increased $632,000 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 $463,200 of independent
investment solicitors' fees for the quarter as compared to $381,600 for the same
period in 2004 and $1,336,300 for the nine month period as compared to
$1,120,480 for the
19
same nine month period in 2004. These increases are due to the sustained growth
in assets under management by Vantage.
Income tax expense of $563,000 was recognized in the quarter ended September 30,
2005 compared to $427,000 for the same period of 2004 as the Company'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 September 30, 2005, cash and cash equivalents totaled $16.8
million or 5% of total assets while investment securities classified as
available for sale totaled $1,717,800. The Bank's borrowings of $73,360,000 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 $3,005,300 for the nine month period
ended September 30, 2005, generated principally from net income of $2,983,900.
Also contributing to operating activities was provision for loan losses and
depreciation, amortization, and accretion of $306,000 and $371,000,
respectively.
Investing activities consist primarily of loan originations and repayments and
investment purchases and maturities. These cash usages primarily consisted of
loan originations of $35,386,900 for the nine months ended September 30, 2005,
as well as investment purchases of $10,128,100 for the same time period.
Partially offsetting the usage of investment activities is $8,918,900 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 nine month period ending September 30, 2005, net cash provided by
financing activities totaled $38,570,200, 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
$54,394,200.
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 September 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 13.5%, 12.2%, 7.0% and 12.7%, 11.4%, 6.5%, respectively, at September
30, 2005.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
------------------------------------------------
as of September 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
None
21
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
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: November 14, 2005 By: /s/ David Z. Richards
-------------------------------------
David Z. Richards
President and Chief Executive Officer
Date: November 14, 2005 By: /s/ Gary M. Bradley
-------------------------------------
Gary M. Bradley
Vice President and Chief Accounting
Officer
23