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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ___ to ___
Commission File Number 333-57277
----------------------------------
Nittany Financial Corp.
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2925762
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
116 E. College Avenue, State College, Pennsylvania 16801
--------------------------------------------------------
(Address of principal executive offices)
(814) 234 - 7320
----------------------------------------------------
(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 08, 1999: 577,436
NITTANY FINANCIAL CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 4
Consolidated Statement of Income (Unaudited)
for the Three Months ended September 30, 1999 and 1998 5
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) 6
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities 18
Item 4. Submissions of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8 - K 18
SIGNATURES 19
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
1999 1998
------------------ ---------------
ASSETS
Cash and due from banks $ 339,986 $ 307,443
Interest-bearing deposits with other banks 3,279,267 5,621,800
Investment securities available for sale 16,144,042 13,150,768
Investment securities held to maturity (market
value of $1,652,336) 1,710,672 -
Loans receivable (net of allowance for loan losses
of $157,764 and $98,988 ) 23,748,711 4,424,132
Premises and equipment 182,693 126,160
Intangible assets 900,504 941,886
Accrued interest and other assets 296,606 218,394
------------------ --------------
TOTAL ASSETS $ 46,602,481 $ 24,790,583
================== ==============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 2,567,289 $ 777,400
Interest-bearing demand 4,818,718 2,146,171
Money market 14,035,933 5,409,434
Savings 1,451,485 1,269,834
Time 10,387,375 4,389,545
------------------ --------------
Total deposits 33,260,800 13,992,384
FHLB advances 8,600,000 5,000,000
Accrued interest payable and other liabilities 266,551 144,546
Commitment to purchase investment security - 500,000
------------------ --------------
TOTAL LIABILITIES 42,127,351 19,636,930
------------------ --------------
STOCKHOLDER'S EQUITY
Serial perferred stock, no par value; 5,000,000 shares
authorized, none issued - -
Common stock, $.10 par value, 10,000,000 shares
authorized; 577,436 issued and outstanding 57,744 57,744
Additional paid-in capital 5,652,145 5,652,145
Retained deficit (768,729) (525,650)
Accumulated other comprehensive loss (466,030) (30,586)
------------------ --------------
TOTAL STOCKHOLDERS' EQUITY 4,475,130 5,153,653
------------------ --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 46,602,481 $ 24,790,583
================== ==============
See accompanying notes to the unaudited consolidated financial statements.
3
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Nine Months Ended September 30,
1999 1998
------------------ --------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 815,577 $ -
Investment securities 728,894 -
Interest-bearing deposits with other banks 81,010 1,996
------------------ --------------
Total interest and dividend income 1,625,481 1,996
------------------ --------------
INTEREST EXPENSE
Deposits 724,560 -
FHLB advances 240,548 -
------------------ --------------
Total interest expense 965,108 -
------------------ --------------
NET INTEREST INCOME 660,373 1,996
Provision for loan losses 60,000 -
------------------ --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 600,373 1,996
------------------ --------------
NONINTEREST INCOME
Service fees on deposit accounts 88,319 -
Investment securities gains, net 1,342 -
Other income 25,606 -
------------------ --------------
Total noninterest income 115,267 -
------------------ --------------
NONINTEREST EXPENSE
Compensation and employee benefits 394,428 79,730
Occupancy and equipment 144,625 439
Data processing 94,452 -
Goodwill amortization 37,427 -
Professional fees 77,664 104,175
Printing and supplies 43,828 118
Other 166,295 51,066
------------------ --------------
Total noninterest expense 958,719 235,528
------------------ --------------
Loss before income taxes (243,079) (233,532)
Income taxes - -
------------------ --------------
NET LOSS $ (243,079) $ (233,532)
================== ==============
LOSS PER SHARE:
Basic $ ($0.42) $ ($10.99)(1)
Diuluted ($0.42) N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 577,436 21,259
Diuluted 577,436 N/A
- ------------------------
(1) - Loss per share is calculated using the weighted average number of shares
outstanding from February 18, 1998, the first date that stock was issued.
See accompanying notes to the unaudited consolidated financial statements.
4
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended September 30,
1999 1998
------------------ --------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 410,363 $ -
Investment securities 277,890 -
Interest-bearing deposits with other banks 20,618 788
------------------ --------------
Total interest and dividend income 708,871 788
------------------ --------------
INTEREST EXPENSE
Deposits 310,235 -
FHLB advances 115,474 -
------------------ --------------
Total interest expense 425,709 -
------------------ --------------
NET INTEREST INCOME 283,162 788
Provision for loan losses 60,000 -
------------------ --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 223,162 788
------------------ --------------
NONINTEREST INCOME
Service fees on deposit accounts 32,816 -
Investment securities gains, net - -
Other income 13,362 -
------------------ --------------
Total noninterest income 46,178 -
------------------ --------------
NONINTEREST EXPENSE
Compensation and employee benefits 158,188 38,017
Occupancy and equipment 49,559 -
Data processing 40,809 -
Goodwill amortization 11,869 -
Professional fees 14,790 100,453
Printing and supplies 17,766 -
Other 66,412 31,773
------------------ --------------
Total noninterest expense 359,393 170,243
------------------ --------------
Loss before income taxes (90,053) (169,455)
Income taxes - -
------------------ --------------
NET LOSS $ (90,053) $ (169,455)
================== ==============
LOSS PER SHARE
Basic $ ($0.16) ($ 6.22)
Diuluted ($0.16) N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 577,436 27,228
Diuluted 577,436 N/A
See accompanying notes to the unaudited consolidated financial statements.
5
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Additional Other Total Compre-
Common Paid-in Retained Comprehensive Stockholders' hensive
Stock Capital Deficit Loss Equity Loss
-------------- ------------ ---------- ------------- --------------- -------------
Balance, December 31, 1998 $ 57,744 $ 5,652,145 $(525,650) $ (30,586) $ 5,153,653
Net loss (243,079) (243,079) $ (243,079)
Other comprehensive loss:
Unrealized loss on available for
sale securities
Comprehensive loss (435,444) (435,444) (435,444)
-------------- ------------ ---------- ------------- --------------- ------------
Balance, September 30, 1999 $ 57,744 $ 5,652,145 $(768,729) $ (466,030) $ 4,475,130 $ (678,523)
============== ============ ========== ============= =============== =============
Components of comprehensive loss: 1999
Change in net unrealized loss on ----
investment securities available
for sale $ (434,558)
Realized gains included in net
income, net of tax (886)
------------
Total $ (435,444)
============
See accompanying notes to the unaudited consolidated financial statements.
6
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30,
1999 1998
------------------ --------------
OPERATING ACTIVITIES
Net loss $ (243,079) $ (233,532)
Adjustments to reconcile net loss to
net cash used for operating activities:
Provision for loan losses 60,000 -
Depreciation, amortization, and accretion,net 115,049 -
Investment securities gains, net (1,342) -
Increase in accrued interest receivable (102,554) -
Increase in accrued interest payable 132,237 -
Other, net 14,110 63,936
------------------ --------------
Net cash used for operating activities (25,579) (169,596)
------------------ --------------
INVESTING ACTIVITIES
Purchase of one year certificate of deposit - (10,548)
Investment securities available for sale:
Purchases (6,851,792) -
Proceeds from sales 428,554 -
Principal repayments 2,462,572 -
Investment securities held to maturity:
Purchases (1,945,065) -
Principal repayments 234,768 -
Net increase in loans receivable (19,395,256) -
Purchase of premises and equipment (86,608) (2,649)
------------------ --------------
Net cash used for investing activities (25,152,827) (13,197)
------------------ --------------
FINANCING ACTIVITIES
Net increase in deposits 19,268,416 -
Proceeds from long-term FHLB advances 3,600,000 -
Net proceeds from the sale of common stock - 250,000
------------------ --------------
Net cash provided by financing activities 22,868,416 250,000
------------------ --------------
Increase (decrease) in cash and cash equivalents (2,309,990) 67,207
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,929,243 29,449
------------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,619,253 $ 96,656
================== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 832,871 $ -
See accompanying notes to the unaudited consolidated financial statements.
7
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") and Nittany
Asset Management, Inc. All significant intercompany items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments that are, in the
opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the fiscal year ended
December 31, 1999 or any other interim period.
These statements should be read in conjunction with the consolidated financial
statements and related notes for the year ended December 31,1998, which are
incorporated by reference to the Company's Annual Report on Form 10-KSB.
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. At September 30, 1999 there was no dilutive effect on common shares
of stock outstanding.
Note 3 - STOCK OPTION PLAN
On October 23, 1998, the Board of Directors adopted a stock option plan for the
directors, officers, and employees which was approved by the stockholders on May
24, 1999. An aggregate of 86,615 shares of authorized but unissued common stock
of the Company were reserved for future issuance under this plan. The stock
options have expiration terms of ten years subject to certain extensions and
terminations. The per share exercise price of a stock option shall be, at a
minimum, equal to the fair value of a share of common stock on the date the
option is granted. Non-qualified and qualified stock options were granted for
the purchase of $82,500 shares, exercisable at the market price of $10.00. Of
this amount, 48,000 and 34,500 stock options were granted to nonemployee
directors and officers and employees, respectively. Options awarded to employees
and officers become first exercisable at a rate of 25 percent and for
non-employee directors at a rate of 33 1/3 percent annually, commencing on the
date of grant.
8
The following table presents share data related to the outstanding options:
Weighted-
average
Stock Exercise
Options Price
------------- ----------
Outstanding, January 1, 1999 $ - $ -
Granted 82,500 10.00
Exercised - -
Forfeited - -
------------- -----------
Outstanding, September 30, 1999 $ 82,500 $ 10.00
============= ===========
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock- based Compensation," the Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations, in accounting for
stock-based awards to employees. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized in the Company's
financial statements. Had compensation expense included stock option plan costs
determined based on the fair value at the grant dates for options granted under
these plans consistent with Statement No. 123, pro forma net income and earnings
per share would not have been materially different than that presented on the
consolidated statements of income.
Note 4 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows:
At September 30, 1999
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ -------------- ---------------
Available for Sale:
U.S. Government agency
securities $ 5,794,706 $ - $ (200,911) $ 5,593,795
Corporate securities 3,537,025 2,178 (14,725) 3,524,478
Mortgage-backed securities 6,823,341 - (252,572) 6,570,769
------------- ------------ ------------- -------------
Total debt securities 16,155,072 2,178 (468,208) 15,689,042
Equity securities 455,000 - - 455,000
------------- ------------ ------------- -------------
Total $ 16,610,072 $ 2,178 $ (468,208) $ 16,144,042
============= ============ ============= =============
At September 30, 1999
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
Held to Maturity:
Mortgage-backed securities $ 1,710,672 $ - $ (58,336) $ 1,652,336
------------- ------------- ------------- -------------
Total $ 1,710,672 $ - $ (58,336) $ 1,652,336
============= ============= ============= =============
9
At December 31,1998
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------- -------------- -------------
Available for Sale:
U.S. Government agency
securities $ 5,716,790 $ 4,048 $ (1,654) $ 5,719,184
Corporate securities 3,533,210 1,322 (13,295) 3,521,237
Mortgage-backed securities 3,624,154 - (21,007) 3,603,147
------------- ----------- ------------- -------------
Total debt securities 12,874,154 5,370 (35,956) 12,843,568
Equity securities 307,200 - - 307,200
------------- ----------- ------------- -------------
Total $ 13,181,354 $ 5,370 $ (35,956) $ 13,150,768
============= =========== ============= =============
Note 5 - LOANS
Loans receivable consists of the following:
September 30, December 31,
1999 1998
--------------- --------------
Real estate loans:
Residential $ 12,826,546 $ 1,653,004
Home equity 2,275,782 997,740
Construction 1,136,733 -
Commercial 5,333,254 858,000
Commercial 633,309 163,122
Consumer loans 1,698,449 860,406
-------------- -------------
23,904,073 4,532,272
Less:
Deferred loan costs (fees), net 2,402 (9,152)
Allowance for loan losses (157,764) (98,988)
------------- -------------
Total $ 23,748,711 $ 4,424,132
============== ===============
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
General
References in this discussion to "we", "us", and"our" refer to Nittany
Bank. In certain instances where appropriate, "we", "us", and "our" refer
collectively to Nittany Financial Corp. and Nittany Bank. References in this
discussion to "Nittany" refers to Nittany Financial Corp.
Nittany 's wholly owned subsidiary, Nittany Bank, commenced operations
as of October 26, 1998, and its activities have primarily consisted of offering
deposits, originating loans and servicing the deposits and loans acquired from
First Commonwealth Bank (the "Branch Acquisitions"). Prior to October 26, 1998,
our primary activities centered on the formation of Nittany Bank.
On May 24, 1999, Nittany Asset Management, Inc. (the "Asset Management Company")
was formed and incorporated as a Pennsylvania corporation. Asset Managment
Company is a wholly owned subsidiary of Nittany and was formed for the purpose
of offering alternative investment products and investment management services
to prospective customers. On August 3, 1999, $10,000 in capital was raised
through the issuance of common stock to Nittany, its sole shareholder. Asset
Management Company intends to begin service operations in the fourth quarter of
1999.
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, risks associated with the a de novo bank, the ability to
control costs and expenses, and general economic conditions. We undertake no
obligation to publicly release the results of any revisions to those forward
looking statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Asset/Liability Management
Our earnings are primarily dependent on our net interest income. Net
interest income is affected by (1) the amount of interest-earning assets and
interest-bearing liabilities, (2) rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities, and (3) the difference
("interest rate spread") between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities. To measure the
relationship of interest-earning assets and interest-bearing liabilities and
their impact on our net interest income, we maintain an asset/liability
management program.
One of the principal functions of our asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates. We evaluate various
interest rate analysis scenarios based upon various assumptions.
Interest rate sensitivity is the relationship of differences in the
amounts and repricing dates of interest-earning assets and interest-bearing
liabilities. These differences, or interest rate repricing "gap," provide an
indication to the extent to which net interest income could be affected by
changes in interest rates. During a period of rising interest rates, a positive
gap (when interest-earning assets are greater than interest-bearing liabilities)
is desirable. A falling interest rate environment would favor a negative gap
position (when interest-earning assets are less than interest-bearing
liabilities). However, not all assets and liabilities with similar maturities
and repricing opportunities will reprice at the same time or to the same degree.
As a result, our gap position is an indicator of our interest rate risk position
but does not necessarily predict the impact on our net interest income given a
change in interest rate levels.
11
The following table sets forth our gap position for September 30, 1999,
based upon contractual repricing opportunities or maturities, with variable rate
products measured to the date of the next repricing opportunity as opposed to
contractual maturities.
Less than
1 year 1-5 years Over 5 Years Total
------ --------- ------------ -----
Interest-earning assets: (Dollars In Thousands)
Loans receivable $ 3,374 $ 1,365 $ 19,166 $ 23,905
Investment securities 6,979 2,051 8,825 17,855
Interest bearing deposits with other banks 3,279 -- -- 3,279
-------- -------- -------- --------
Total interest-earning assets $ 13,632 $ 3,416 $ 27,991 $ 45,039
-------- -------- -------- --------
Interest-bearing liabilities
NOW accounts $ 4,819 $ -- $ -- $ 4,819
Money market accounts 14,036 -- -- 14,036
Savings accounts 1,451 -- -- 1,451
Certificates of deposit 5,953 3,869 565 10,387
FHLB advances 8,000 600 -- 8,600
-------- -------- -------- --------
Total interest-bearing liabilities $ 34,259 $ 4,469 $ 565 $ 39,293
-------- -------- -------- --------
Excess interest-earning
assets (liabilities) $(20,627) $ (1,053) $ 27,426
======== ======== ========
Cumulative interest-earning assets $ 13,632 $ 17,048 $ 45,039
Cumulative interest-bearing liabilities 34,259 38,728 39,293
-------- -------- --------
Cumulative gap $(20,627) $(21,680) $ 5,746
======== ======== ========
Cumulative interest rate
sensitivity ratio (1) (.40) (.44) 1.15
======== ======== ========
- --------
(1) Cumulative interest-earning assets divided by cumulative interest-bearing
liabilities.
12
Average balances are derived from daily averages calculated for the
nine months ended September 30, 1999.
For the Nine Months Ended September 30,
---------------------------------------
1999
---------------------------------------
Average Average
Balance Interest(1) Yield/Cost(4)
------- ----------- -------------
(Dollars in thousands)
Interest-earning assets:
Loans receivable.............................. $14,068 $ 816 7.73%
Investments securities........................ 16,436 729 5.91%
Interest-bearing deposits with other banks.... 2,760 80 3.91%
------ ------
Total interest-earning assets................... 33,264 1,625 6.52%
-----
Noninterest-earning assets...................... 1,859
Allowance for loan losses....................... (107)
-----
Total assets.................................... $35,016
=======
Interest-bearing liabilities:
Interest-bearing demand deposits.............. $ 2,975 44 1.96%
Money market deposits......................... 10,738 393 4.88%
Savings deposits.............................. 1,297 32 3.31%
Certificates of deposit....................... 6,560 255 5.19%
Advances from FHLB............................ 6,835 241 4.69%
------ -------
Total interest-bearing liabilities.............. $28,404 965 4.53%
------- -------
Noninterest-bearing liabilities
Demand deposits............................... $ 1,577
Other liabilities............................. 219
Stockholders' equity............................ 4,815
------
Total liabilities and stockholders' liability... $35,016
=======
Net interest income............................. $ 660
======
Interest rate spread (2)........................ 1.99%
Net yield on interest-earning assets(3)......... 2.65%
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 117.11%
- ---------------
(1) Interest income and expense are for the period that banking operations were
in effect.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Average yields are computed using annualized interest income and expense
for the periods.
13
Comparison of Financial Condition
We continued to experience strong growth during the nine-month period
ended September 30, 1999 with total assets increasing 88.0% to $46,602,000 from
$24,791,000 at December 31, 1998. This growth was stimulated primarily by an
increase in loans, net of allowance for loan losses, of $19,325,000, and was
funded through growth in various deposit products totaling $19,268,000 and
additional Advances from the Federal Home Loan Bank of $3,600,000.
At the period ended September 30, 1999, total cash and cash equivalents
totaled $3,619,000 as compared to $5,929,000 at December 31, 1998. Management
maintains a level of cash equivalents which is desirable for meeting the normal
cash flow requirements of its customers for the funding of loans and repayment
of deposits.
Investment securities increased $4,704,000 or 35.8% to $17,855,000 at
September 30, 1999 from $13,151,000 at December 31, 1998. The growth within the
investment portfolio was primarily structured toward mortgage-backed securities
with varying maturities between six and twenty-four years. Of the $4,678,000 in
mortgage-backed securities growth, management has classified $1,711,000 as held
to maturity securities.
Net loan receivables increased from $4,424,000 at December 31, 1998 to
$23,749,000 at September 30, 1999. Of this increase, approximately 93.2% or
$18,064,000 was comprised of loans secured by various forms of real estate. The
real estate lending growth included $11,174,000 in one-to-four family mortgages
and $4,475,000 in commercial real estate. Additionally, $2,415,000 was added
during the period in home equity and construction mortgages. Such increases
primarily reflected the economic health of our market area and the strategic,
service-oriented marketing approach taken by management to meet the lending
needs of the area. As of September 30, 1999, we had outstanding loan funding
commitments of approximately $2.9 million.
At September 30, 1999, our allowance for loan losses increased
approximately $59,000, to $158,000 from $99,000 at December 31, 1998, due to the
overall increase in the loan portfolio. Management continually evaluates the
adequacy of the allowance for loan losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses
of other financial institutions in our market area, the impact of economic
conditions on borrowers and other relevant factors that may come to the
attention of management. Although we maintain our allowance for loan losses at a
level that we consider to be adequate to provide for the inherent risk of loss
in our loan portfolio, there can be no assurance that future losses will not be
required in future periods.
Deposits increased $19,269,000 or 137.7% to $33,261,000 at September
30, 1999 compared to $13,992,000 at December 31, 1998. The growth was spread
among three primary sources: money market accounts of $8,626,000, time deposits
of $5,998,000 and demand deposits $4,462,000. Such growth resulted primarily
from the marketing efforts of promoting the opening of a new community bank in
the State College Area.
Advances from the Federal Home Loan Bank increased $3,600,000 to
$8,600,000 at September 30, 1999 compared to $5,000,000 at December 31, 1998.
Management applied approximately $3,000,000 of this increase in borrowed funds
to purchase investment securities. The positive spreads between the earnings on
investments purchased and the related expenses incurred on borrowed funds will
provide an additional source of income. Of the $8,600,000 of advances from the
Federal Home Loan Bank,
14
approximately $8,000,000 is due to mature or reprice within the next year and
are comprised of LIBOR- based floating rate credit arrangements. During the
third quarter of 1999, $517,000 of the deposit growth was used to pay down
borrowed funds comprised almost exclusively of Federal Home Loan Bank advances.
At September 30, 1999, accumulated other comprehensive loss increased
$435,000, to a loss of $466,000 from a loss of $31,000 at December 31, 1998. The
increase in loss resulted from the fluctuation in market value of our investment
in available for sale securities. See Note 3 to the consolidated financial
statements. Because of interest rate volatility, accumulated other comprehensive
loss and stockholders' equity could materially fluctuate for each interim period
and year-end period. The decrease in market value of the investment securities
available for sale is considered temporary in nature and will not affect our net
income until the securities are sold. We plan to hold these securities until
maturity or until the market values of these securities increase. Accordingly,
we do not expect, though there is no assurance, that our investment in these
securities will affect net income in future periods.
Results of Operations
Net interest income for the three and nine months ended September 30,
1999 was $283,000 and $660,000, respectively. The interest rate spread for the
three and nine month periods ended September 30, 1999 was 2.07% and 1.99%,
respectively. Despite a slight increase in general interest rate levels during
the period, both interest income and expense were driven by increases in average
balances of interest-earning assets and interest-bearing liabilities. Of the
$22,966,000 and $23,545,000 increase in average interest-earning assets and
interest-bearing liabilities, respectively, during the three month period ended
September 30, 1999, $19,357,000 and $15,745,000, were primarily the result of
loan and deposit growth, respectively. In comparison, loan and deposit growth
during the nine month period ended September 30, 1999 of $12,392,000 and
$9,826,000, respectively, were the primary factors accounting for the
$14,446,000 and $15,829,000 increase in average interest-earnings assets and
interest-bearing liabilities, respectively. As noted previously, this growth is
a response to the overall economic health of our market area, and the strategic,
service-oriented marketing approach taken by management to meet the both the
lending and deposit needs of the area.
Non-interest income the three and nine month periods ending September
30, 1999 was $46,000 and $115,000, respectively. Non-interest income items are
primarily comprised of normal service charges and fees on deposits, along with
fee income derived from ATM surcharges. Such amounts have progressively
increased during each quarter of 1999 as the number of deposit accounts and
volume of related transactions have increased.
Non-interest expense for the three and nine month periods ending
September 30, 1999 was $359,000 and $959,000, respectively. Non-interest
expenses are comprised primarily of employee compensation and benefits,
occupancy and equipment, data processing, and other non-interest expenses. These
costs are the result of operating a larger organization, including the necessary
investments in skilled employees, facilities and technology; as well as
contracting the services of a third party processor for check and deposit
activity and transaction processing costs related to the two ATM's. Included in
other non-interest expense for the three and nine months ended September 30,
1999, is a non-recurring charge of $41,000. This charge relates to additional
expenses incurred in connection with our Branch Acquisitions.
15
Liquidity and Capital Resources
Management monitors both Nittany's and Nittany Bank's Total risk-based,
Tier I risk-based and Tier I leverage capital ratios in order to assess
compliance with regulatory guidelines. At September 30, 1999, we exceeded our
minimum risk-based and leverage capital ratio requirements. Nittany and Nittany
Bank's Total risk-based, Tier I risk-based and Tier I leverage ratios were
12.9%, 12.4%, 8.7% at September 30, 1999.
Year 2000 Readiness
The year 2000 problem is associated with the inability of some computer
programs to distinguish between the year 1900 and the year 2000 because of
software programs that were written with a two digit year field instead of a
four digit field. If not correctly programmed or rewritten, some computer
applications could fail to operate or may create erroneous results when the year
changes to 2000 or other key dates in the first quarter of the year 2000. This
could cause entire system failures, miscalculations and disruptions of normal
business operations. As the banking industry is heavily dependent on computer
systems, the effect of this problem could be the temporary inability to process
transactions, generate statements and billings or engage in normal day to day
business activities. The extent of the potential impact of this problem is not
known and if not corrected in a timely manner, could affect the global economy.
Management and the Board of Directors has viewed the year 2000
initiative as a high priority of the Company and considers itself adequately
prepared for the date change. We continue to aggressively pursue appropriate
solutions and assurances with regard to compliance of all potentially affected
applications by the year 2000. The five phases of awareness, assessment,
renovation, validation and implementation have been completed by September 30,
1999.
Late in 1998, we organized a Y2K Readiness Committee comprised of
senior managers of the bank along with various key personnel in all departments.
Working through the various stages of Y2K compliance did not adversely affect
our business plan for 1999 or delay any planned technology projects.
It has not been necessary for us to hire any external consultants.
During the awareness phase, we provided the Board of Directors with
monthly updates and received input from our board members. The process of
gathering and sharing information included customers, employees and management.
The process was directed by an internal employee assigned the responsibility for
coordination in conjunction with a year 2000 team comprised of employees at all
levels of Nittany Bank. Brochures, mailings and statements stuffers were used to
keep customers abreast of the issues related to the year 2000. During the fourth
quarter, we will continue to work with customers to prepare and inform them of
the various risk issues associated with the date change.
The process of assessment was completed in the fourth quarter of 1998
and included the inventorying of all hardware and software and the
identification of all systems, vendors and other services which could be
affected by the date change. Our year 2000 committee then determined which items
were "mission critical" and ranked them with our highest priority. All outside
vendors and commercial loan customers were asked to provide written
documentation of their compliance and complete a survey prepared by the bank.
Additionally, testing of internal equipment and services, such as fax machines,
computers and security equipment was completed.
16
The core processing system of Nittany Bank was determined to be the
most critical item that could affect us. A third party service bureau (the
"service bureau") provides Nittany Bank with all of the material data processing
that could be affected by this problem. The third party service bureau has
provided Nittany Bank with information and testing opportunities that management
deems to be adequate in supporting their claim of year 2000 readiness.
Additionally, the service bureau has provided us with a detailed contingency
plan for Nittany Bank, in case problems arise after the first day of January
2000. The core application software vendor, whose products are used by the
service bureau, has obtained ITAA*2000 certification, which indicates that the
software has the core capabilities needed to handle the Year 2000 challenge.
As a new operation opened during the awareness of the year 2000 issue,
Nittany Bank was cognizant of the issues as new equipment and vendors were
implemented. As such, the estimated costs associated with addressing the year
2000 issue were estimated not to exceed $10,000. To date, less than $5,000 has
been expended.
The validation phase included extensive testing of all hardware,
software and systems provided by third party vendors. As of September 30, 1999,
all "mission critical" core applications have been sufficiently upgraded and/or
replaced.
All commercial borrowers of Nittany Bank with aggregate balances
exceeding $100,000 have completed a risk assessment questionnaire and management
determined the risk associated with such borrowers to be low.
A Contingency and Business Resumption Plan was adopted by the Board of
Directors in August 1999. The most realistic risk posed to us is the possible
liquidity risk associated with large year-end customer withdrawals. We have
addressed the contingency plan for such risk and are prepared to meet expected
cash demands that may occur. Various agreements and sources of liquidity are in
place, if needed. However, year 2000 issues could affect our liquidity if
customer withdrawals in anticipation of the year 2000 are greater than expected.
Customer awareness continues to be a priority and we expect to provide
additional communication to our customers leading up to the year 2000 date
change.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with us, such as customers, vendors, payment system providers, utility
companies, and other financial institutions, makes it impossible to assure that
a failure to achieve compliance by one or more of these entities would not have
a material impact on our financial statements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." ("Statement No. 133"). This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. Statement No. 133 supersedes the
disclosure requirements in Statements No. 80, 105 and 119. Statement of
Financial Accounting Standards No. 137 deferred the
17
effective date of this statement to fiscal years beginning after June 15, 2000.
The adoption of Statement No. 133 is not expected to have a material impact on
the financial position or results of Nittany.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("Statement No. 134"). This statement amends FASB Statement No. 65 "Accounting
for Certain Mortgage Banking Activities," to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. Statement No. 134 is effective January 1, 1999. The adoption of
this statement is not expected to have a material impact on the financial
position or results of operations of Nittany.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in rights of the Company's security holders
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are 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 Employment Agreement between the Bank and David Z.
Richards**
10.1 Stock Option Plan
27 Financial Data Schedule (electronic data filing only)
-------------------
** Incorporated by reference to the identically numbered
exhibit to the registration statement Form SB-2 (File
No. 333-57277) declared effective by the SEC on July
31, 1998.
(b) Reports on Form 8-K
None
19
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 10, 1999 By: /s/David Z. Richards
-------------------------------------
David Z. Richards
President and Chief Executive Officer
(Chief Accounting Officer)