<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-13793
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-1504091
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201
(Address of principal executive offices) (Zip Code)
</TABLE>
(717) 459-3700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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
---- ----
Yes No X
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: The Registrant had
6,427,350 shares of Common Stock outstanding as of March 31, 1998.
<PAGE> 2
TABLE OF CONTENTS
Item
No.
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
March 31, 1998 (unaudited) and September 30, 1997................ 1
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 .................................................. 2
Consolidated Statements of Operations for the Six Months Ended
March 31, 1998 .................................................. 3
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1998 and 1997(unaudited)............................... 4-5
Notes to Consolidated Financial Statements (unaudited)........... 6-9
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 10-20
3 Quantitative and Qualitative Disclosures about Market Risk....... 20
PART II - OTHER INFORMATION
1 Legal Proceedings................................................ 21
2 Changes in Securities and Use of Proceeds........................ 21
3 Defaults Upon Senior Securities.................................. 21
4 Submission of Matters to a Vote of Security Holders.............. 21
5 Other Information................................................ 21
6 Exhibits and Reports on Form 8 - K............................... 21-22
Signatures
<PAGE> 3
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statements of Financial Condition
March 31, 1998 (unaudited) and September 30, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
Assets (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 34,443 $ 13,214
Securities held-to-maturity (estimated fair value of $56,471 in
1998 and $38,869 in 1997) 56,987 38,925
Securities available-for-sale 71,175 44,773
Loans (less allowance for loan losses of $1,734 for 1998 and $1,272
for 1997) 267,540 261,469
Accrued interest receivable 2,837 2,169
Real estate owned, net 164 319
Property and equipment, net 7,107 6,762
Other assets 3,149 1,611
-------- --------
Total assets $443,402 $369,242
======== ========
Liabilities and Equity
Deposits $311,660 $314,123
Federal Home Loan Bank advances 43,507 23,516
Other borrowings 223 92
Advances from borrowers and insurance 1,001 477
Accrued interest payable 604 745
Other liabilities 2,433 1,751
-------- --------
Total liabilities $359,428 $340,704
Common stock ($.01 par value; 16,000,000 authorized shares;
6,427,350 shares issued) 64 -
Additional paid-in capital 61,959 -
Unearned employee stock ownership plan (ESOP) shares (5,142) -
Retained earnings - substantially restricted 25,321 27,255
Unrealized gain on available-for-sale securities, net 1,772 1,283
-------- --------
Total equity $ 83,974 $ 28,538
-------- --------
Total liabilities and equity $443,402 $369,242
======== ========
</TABLE>
1
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statements of Operations
For the Three Months Ended March 31, 1998 and 1997 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Three months ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Interest Income:
Loans $ 5,258 $ 4,917
Mortgage-related securities 688 751
Investment securities:
Taxable 962 712
Non-taxable 206 58
------- -------
Total interest income 7,114 6,438
Interest Expense:
Deposits 3,084 3,090
Federal Home Loan Bank advances and other 629 291
------- -------
Total interest expense 3,713 3,381
Net interest income 3,401 3,057
Provision for loan losses 219 57
------- -------
Net interest income after provision for loan losses 3,182 3,000
Non-interest Income:
Service charges and other fees 176 145
Gain (loss) on sale of:
Real estate owned -- 2
Loans (2) 3
------- -------
Total non-interest income 174 150
Non-interest Expense:
Salaries and net employee benefits 1,459 1,263
Occupancy costs 386 365
Federal deposit insurance premiums 72 72
Data processing 62 86
Professional fees 73 72
Federal Home Loan Bank service charges 101 68
Charitable contributions(1) 4,773 13
Other 307 284
------- -------
Total non-interest expense 7,233 2,223
Income (loss) before income taxes (3,877) 927
Income taxes (1,386) 284
------- -------
Net income (loss) $(2,491) $ 643
======= =======
Earnings per share(2) N/A N/A
</TABLE>
(1) March 31, 1998 includes a charitable contribution of $4,761,000 made to the
First Federal Charitable Foundation.
(2) Due to the recent conversion and formation of the Company, earnings per
share figures for the current period are not applicable. Had the Company's
stock been outstanding for the entire period, earnings per share would have
been ($.42) for the three months ended March 31, 1998. Had the net proceeds
from the conversion of $52,120,620 been invested in a one-year Treasury CMT,
at an average yield of 5.3167%, earnings per share for the three months
ended March 31, 1998 would have been ($.34).
2
<PAGE> 5
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statements of Operations
For the Six Months Ended March 31, 1998 and 1997 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Interest Income:
Loans $ 10,526 $ 9,833
Mortgage-related securities 1,399 1,501
Investment securities:
Taxable 1,769 1,559
Non-taxable 334 111
-------- --------
Total interest income 14,028 13,004
Interest Expense:
Deposits 6,314 6,325
Federal Home Loan Bank advances and other 1,107 568
-------- --------
Total interest expense 7,421 6,893
Net interest income 6,607 6,111
Provision for loan losses 487 89
-------- --------
Net interest income after provision for loan losses 6,120 6,022
Non-interest Income:
Service charges and other fees 353 303
Gain (loss) on the sale of:
Real estate owned (34) (11)
Loans 4 5
Available-for-sale securities 8 --
Other 2 1
-------- --------
Total non-interest income 333 298
Non-interest Expense:
Salaries and net employee benefits 2,683 2,498
Occupancy costs 760 728
Federal deposit insurance premiums 143 225
Data processing 136 182
Professional fees 120 127
Federal Home Loan Bank service charges 178 126
Charitable contributions(1) 4,898 38
Other 579 539
-------- --------
Total non-interest expense 9,497 4,463
Income (loss) before income taxes (3,044) 1,857
Income taxes (1,110) 569
-------- --------
Net income (loss) $ (1,934) $ 1,288
======== ========
Earnings per share(2) N/A N/A
</TABLE>
(1) March 31, 1998 includes a charitable contribution of $4,761,000 made to
First Federal Charitable Foundation.
(2) Due to the recent conversion and formation of the Company, earnings per
share figures for the current period are not applicable. Had the Company's
stock been outstanding for the entire period, earnings per share would have
been ($.33) for the six months ended March 31, 1998. Had the net proceeds of
$52,120,620 been invested in a one year Treasury CMT, at an average yield of
5.3167%, earnings per share for the six months ended March 31, 1998 would
have been ($.25).
3
<PAGE> 6
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statement of Cash Flows
For the Six Months ended March 31, 1998 and 1997 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31,
Operating Activities: 1998 1997
---- ----
<S> <C> <C>
Net Income (loss) ($ 1,934) $ 1,288
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for REO loss (53) 26
Provision for loan losses 487 89
Depreciation 292 330
Deferred income tax benefit (1,979) (33)
Funding of First Federal Charitable Foundation 4,761 --
Amortization and accretion on:
Held-to-maturity securities 18 29
Available-for-sale securities 56 36
Amortization of deferred loan fees (123) (102)
(Gain) loss on sale of:
Real estate loans acquired through foreclosure 26 (2)
Loans (4) (5)
Available-for-sale securities (8) --
Gain on disposal of property and equipment (2) (1)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (668) 87
(Increase) decrease in other assets (172) 144
Increase (decrease) in accrued interest payable (141) 18
Increase in accrued income taxes payable 620 601
Increase (decrease) in other liabilities 503 (1,886)
-------- --------
Net cash provided by operating activities 1,679 619
Investing Activities:
Loan origination and principal payments on loans (8,573) (8,397)
Proceeds from sale of:
Available-for-sale securities -- 8,402
Real estate acquired through foreclosure 226 28
Loans 2,098 686
Proceeds from repayments of held-to-maturity securities 13,038 6,049
Proceeds from repayments of available-for-sale securities 15,570 3,770
Proceeds from disposal of fixed assets 2 1
Purchase of:
Held-to-maturity securities (31,118) (3,604)
Available-for-sale securities (40,662) (18,950)
Office properties and equipment (637) (204)
Federal Home Loan Bank stock (697) (95)
-------- --------
Net cash used in investing activities (50,753) (12,314)
Financing Activities:
Net increase (decrease) in deposit accounts (2,463) 3,502
Net increase in Federal Home Loan Bank short-term advances 3,972 2,251
Borrowings of Federal Home Loan Bank long-term advances 25,000 15,000
Repayments of Federal Home Loan Bank long-term advances (8,981) (8,760)
Net increase in advances from borrowers for taxes and insurance 524 382
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
For the Six Months Ended
March 31,
1998 1997
(unaudited)
<S> <C> <C>
Net increase in other borrowings 131 --
Net proceeds from issuance of common stock 52,120 --
------ ------
Net cash provided by financing activities 70,303 12,375
Increase in cash and cash equivalents 21,229 680
Cash and cash equivalents, beginning of year 13,214 4,045
------ ------
Cash and cash equivalents, end of year 34,443 4,725
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 7,575 6,699
====== ======
Income taxes 250 0
====== ======
Supplemental disclosure - non-cash information:
Transfer from loans to real estate owned 44 110
====== ======
</TABLE>
5
<PAGE> 8
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Notes to Consolidated Financial Statements (unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statements Presentation
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all
normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial statements, have
been included. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in
the Bank's Annual Report for the period ended September 30, 1997. The
results for the six months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended
September 30, 1998.
Business
Northeast Pennsylvania Financial Corp.(the Company) is the holding
company for First Federal Bank. The Company's principal subsidiary,
First Federal Bank, serves the greater Hazleton area, Mountaintop,
Bloomsburg, Lehighton, and all of Schuylkill County through ten office
locations. The Bank provides a wide range of banking services to
individual and corporate customers. The Company is subject to
competition from other financial institutions and other companies that
provide financial services. The Company is subject to the regulations
of certain federal agencies and undergoes periodic examinations by
those regulatory authorities.
Principles of Consolidation and Presentation
The accompanying financial statements of the Company include the
accounts of Hazleton Bancorp, Inc., FIDACO, Inc., and First Federal
Bank. First Federal Bank is a wholly-owned subsidiary of Northeast
Pennsylvania Financial Corp. Both Hazleton Bancorp, Inc. and FIDACO,
Inc. are inactive subsidiaries of First Federal Bank with the only
major asset being an investment by FIDACO, Inc. in Hazleton Community
Development Corporation. All material inter-company balances and
transactions have been eliminated in consolidation. Prior period
amounts are reclassified, when necessary, to conform with the current
year's presentation.
Earnings per Share
Due to the Bank's recent conversion and formation of the Company,
earnings per share figures for the current and prior year periods are
not applicable. Had the company's stock been outstanding for the entire
period, earnings per share would have resulted in a negative earning of
$0.42 for the three months ended and negative earnings of $0.33 for the
six months ended March 31, 1998. Had the net proceeds from the
conversion of $52,120,620 been invested in a one-year Treasury CMT, at
an average yield of 5.3167%,
6
<PAGE> 9
earnings per share would have been ($.34) and ($.25) for the three and
six months ending March 31, 1998, respectively. Basic earnings per
share and diluted earnings per share are the same for the period ending
March 31, 1998 and March 31, 1997 due to the Company not having
dilutive instruments.
2. Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
statement does not require a specific format for that financial
statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that
financial statement. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company will make appropriate
disclosures in the applicable consolidated financial statements, as
required.
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Management has not yet
determined the impact, if any, of this statement on the Company.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Post Retirement Benefits." This Statement
revises employers' disclosures about pension and other post-retirement
benefit plans. It does not change the measurement or recognition of
those plans. It standardizes the disclosure requirements for pensions
and other post-retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminate certain disclosures that are no longer useful as they were
when "FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Post-retirement Benefits Other Than
Pensions," were issued. This statement requires changes in disclosures
and would not affect the financial condition or operating results of
the Company. This Statement is effective for the fiscal years beginning
after December 15, 1997.
7
<PAGE> 10
3. Conversion to Stock Form of Ownership
The Company is a business corporation formed at the direction of the
Bank under the laws of Delaware on December 16, 1997. On March 31,
1998,: (i) the bank converted from a federally chartered mutual savings
and loan association to a federally chartered stock savings bank; (ii)
the Bank issued all of its outstanding capital stock to the Company;
and (iii) the Company consummated its initial public offering of common
stock, par value $.01 per share (the "Common Stock"), by selling at a
price of $10.00 per share, 5,437,062 shares of Common Stock to certain
eligible account holders of the Bank who had subscribed for such shares
(collectively, the "Conversion"), by selling 514,188 shares to the
Bank's Employee Stock Ownership Plan and related trust ("ESOP") and by
contributing 476,100 shares of Common Stock to The First Federal
Charitable Foundation (the "Foundation"). The Conversion resulted in
net proceeds of $52.1 million, after expenses of $2.2 million. Net
proceeds of $25 million were invested in the Bank to increase the
Bank's tangible capital to 13.3% of the Bank's total adjusted assets.
The Company also established the Foundation, dedicated to the
communities served by the Bank. In connection with the Conversion, the
common stock contributed by the Company to the Foundation at a value of
$4.8 million was charged to expense.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, the Bank
established a liquidation account at the time of the conversion in an
amount equal to the equity of the Bank as of the date of its latest
balance sheet date, September 30, 1997, contained in the final
Prospectus used in connection with the Conversion. In the unlikely
event of a complete liquidation of the Bank, (and only in such an
event), eligible depositors who continue to maintain accounts at the
Bank shall be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account which decreases if
the balances of eligible deposits decreases at the annual determination
dates, approximated $28.5 million (unaudited) at March 31, 1998.
The Company may not declare nor pay dividends on its stock if such
declaration and payment would violate statutory or regularly
requirements.
In addition to the 16,000,000 authorized shares of common stock, the
Company authorized 2,000,000 shares of preferred stock with a par value
of $0.01 per share (the "Preferred Stock"). The Board of Directors is
authorized, subject to any limitations by law, to provide for the
issuance of the shares of preferred stock in series, to establish from
time to time the number of shares to be included in each such series,
and to fix the designation, powers, preferences, and rights of the
shares of each such series and any qualifications, limitations or
restriction thereof. As of March 31, 1998, there were no shares of
preferred stock issued.
8
<PAGE> 11
4. Loans
<TABLE>
<CAPTION>
Loans are summarized as follows: March 31, September 30,
1998 1997
Real Estate loans: (unaudited)
<S> <C> <C>
One-to-four family $ 180,069 $ 179,101
Multiple family and commercial 8,546 6,701
Construction 3,782 5,818
--------- ---------
Total real estate loans 192,397 191,620
--------- ---------
Consumer Loans:
Home equity loans and lines of credit 46,557 41,278
Automobile 15,424 13,678
Education 2,550 2,348
Unsecured lines of credit 1,646 1,310
Other 1,206 3,229
--------- ---------
Total consumer loans 67,383 61,843
--------- ---------
Commercial loans 10,992 10,775
--------- ---------
Total loans 270,772 264,238
--------- ---------
Less:
Allowance for loan losses (1,734) (1,272)
Deferred loan origination fees (1,498) (1,497)
--------- ---------
Total loans, net $ 267,540 $ 261,469
========= =========
</TABLE>
<TABLE>
<CAPTION>
For the six
months ended For the year ended
March 31, 1998 September 30, 1997
<S> <C> <C>
Balance, beginning of period 1,272 730
Charge-offs (27) (132)
Recoveries 2 23
Provision for loan losses 487 651
------- -------
Balance, end of period $ 1,734 $ 1,272
======= =======
</TABLE>
5. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
-------------- ------------------
Percent of Percent of
Amount Total Amount Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) $ 71,624 23.0% $ 71,779 22.8%
Money market accounts 15,128 4.8% 13,821 4.4%
Certificates of deposit less than $100,000 165,101 53.0% 161,844 51.5%
Certificates of deposit greater than $100,000(1) 22,427 7.2% 30,892 9.9%
NOW Accounts 26,732 8.6% 27,302 8.7%
Non-interest bearing deposits 10,648 3.4% 8,485 2.7%
-------- ---- -------- ----
Total deposits at end of period $311,660 100% $314,123 100%
======== ===== ======== =====
</TABLE>
(1) Deposit balances in excess of $100,000 are not federally insured.
9
<PAGE> 12
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information, this 10-Q may include certain forward
looking statements based on current management expectations. The Company's
actual results could differ materially from those management expectations.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, rates and regulations of federal, state and
local tax authorities, changes in interest rates, deposit flows, the cost of
funds, demand for loan products, demand for financial services, competition,
changes in the quality or composition of the Bank's loan and investment
portfolios, changes in accounting principles, policies or guidelines, and other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Further
description of the risks and uncertainties to the business are included in
detail in Section B, Management Strategy; Section C, Management of Interest Rate
Risk and Market Risk Analysis; and Section G, Liquidity and Capital Resources.
A. GENERAL
Northeast Pennsylvania Financial Corp. (the "Company") is the holding company
for First Federal Bank (the "Bank"), a federally chartered capital stock savings
bank. First Federal Bank is regulated by the Office of Thrift Supervision
("OTS"). The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and investment portfolios and its cost of funds, consisting of the interest paid
on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan and security sales activities, service
charges and other fee income, and non-interest expense. The Bank's non-interest
expense principally consists of compensation and employee benefits, office
occupancy and equipment expense, federal deposit insurance premiums, data
processing, advertising and business promotion and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
B. MANAGEMENT STRATEGY
Since fiscal year 1993, the Bank's operating strategy has been that of a
community-based bank, offering a wide variety of savings products to its retail
customers, while concentrating on residential and construction lending and, to a
lesser extent, consumer lending and small business and municipal commercial
lending. In order to promote long-term financial strength and profitability, the
Bank's operating strategy has focused on: (i) maintaining strong asset quality
by originating one-to-four family loans located in its market area; (ii)
increasing profitability by emphasizing higher yielding consumer and commercial
loans; (iii) managing its interest rate risk by emphasizing shorter-term,
fixed-rate, one-to-four family loans, in addition to consumer and commercial
loans; limiting its retention of newly-originated longer-term fixed-rate
one-to-four family loans; soliciting longer-term deposits; utilizing longer-term
advances from the FHLB; and investing in investment and mortgage-related
securities having shorter estimated durations; (iv) meeting the banking needs of
its customers through expanded products and improved delivery
10
<PAGE> 13
systems by taking advantage of technological advances; and (v) maintaining a
strong regulatory capital position.
The Bank has attempted to diversify and expand its loan products to better serve
its customer base by placing a greater emphasis on consumer lending and
commercial lending, primarily to small businesses and municipalities.
Additionally, the Bank has implemented a program to sell in the secondary market
longer-term, fixed-rate one-to-four family loans which it originates in excess
of its retention policy for such loans. Previously, as a result of its policy to
limit its retention of newly originated longer-term, fixed-rate one-to-four
family loans to 20% of total loan origination during a fiscal year, periodically
the Bank had to limit its origination of such loans. The Bank is also evaluating
the offering of loan products which it has historically not offered, such as
nonconforming or subprime one-to-four family loans. In the event the Bank
originates such loan products, it currently intends to originate such loans for
sale in the secondary market. The Bank has a signed letter of intent to purchase
approximately $7.5 million of new and used automobile loans from a local
financial institution with an expected yield to the Bank of 7.9%. The
acquisition of the loans is expected to be completed in the third fiscal
quarter.
C. MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board of Directors has
established an Asset Liability Committee ("ALCO"), which is responsible for
reviewing asset/liability policies and interest rate risk position. The ALCO
meets on a quarterly basis, reports trends and interest rate risk position to
the Finance Committee of the Board of Directors and reviews with them its
activities and strategies, the effect of those strategies on the Bank's net
interest margin, the market value of the portfolio, and the effect the changes
in interest rates will have on the Bank's portfolio and exposure limits. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Bank.
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (i) emphasizing the origination and retention of fixed-rate
mortgages having terms of maturity of not more than fifteen years,
adjustable-rate and shorter-term loans, commercial loans and consumer loans;
(ii) limiting the origination of all greater than 15-year fixed-rate mortgage
loans to no more than 20% of the total originations in a given year, and; (iii)
investing in shorter-term and, to a lesser extent, adjustable-rate securities
which generally bear lower yields, compared to longer-term investments, but
which better position the Bank for increases in market interest rates. In
January 1998, the Bank began selling, in the secondary mortgage market,
production of 15-year fixed-rate mortgage loans originated with terms greater
than 15 years, which exceeds the 20% limitation, while retaining the servicing
rights.
Management believes that reducing its exposure to interest rate risk
fluctuations will enhance long-term profitability. However, the Bank's
strategies may adversely impact net interest income due to lower initial yields
on some of these investments in comparison to longer-term
11
<PAGE> 14
fixed-rate investments and whole loans. To promote a higher yield on its
investment securities while at the same time addressing the Bank's interest rate
risk management policies, the Bank has invested a significant portion of its
portfolio of investment securities in longer-term (more than five years) federal
agency obligations which have call features. Given the rates of such securities
in comparison to current market interest rates, the Bank anticipates the
substantial majority of such securities will be called prior to their
contractual maturity. However, if changes in interest rates exceed ranges
anticipated by the Bank in estimating the anticipated life of such callable
securities, the Bank would be subject to increased interest rate or reinvestment
risk, depending on the direction of the change in market interest rates.
D. GAP ANALYSIS
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within a period. At March 31, 1998, the Bank's
cumulative one year gap was a negative 3.3% of total assets compared to a
negative 9.9% at September 30, 1997. September's interest rate sensitivity gap
reflected the temporary use of proceeds from the sale of investment and
mortgage-related securities at the end of fiscal 1997, which significantly
increased interest-bearing deposits and reduced FHLB advances as of September
30, 1997 compared to their levels immediately prior to the sale of securities.
March's interest rate sensitivity gap reflects the proceeds from the sale of the
Company's stock. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, an institution with a negative gap
position would be in a worse position to invest in higher yielding assets as
compared to an institution with a positive gap position which, consequently, may
result in the cost of its interest-bearing liabilities increasing at a rate
faster than its yield on interest-earning assets than if it had a positive gap.
During a period of falling interest rates, an institution with a negative gap
position would tend to have its interest-earning liabilities repricing downward
at a faster rate than its interest-earning assets as compared to an institution
with a positive gap which, consequently, may tend to positively affect the
growth of its net interest income.
Certain shortcomings are inherent in gap analysis. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of changes in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from prior projections. Finally, the ability of
many borrowers to service their adjustable-rate loans may decrease in the event
of an interest rate increase.
12
<PAGE> 15
E. NET PORTFOLIO VALUE
The Bank's interest rate sensitivity is primarily monitored by management
through the use of a model which internally generates estimates of the change in
the Bank's net portfolio value ("NPV") over a range of interest rate scenarios.
Such analyses are prepared by a third party for the Bank. NPV is the present
value of expected cash flows from assets, liabilities, and off-balance sheet
contracts. The NPV ratio, under any interest rate scenario, is defined as the
NPV in that scenario divided by the market value of assets in the same scenario.
The model assumes estimated loan prepayment rates, reinvestment rates, and
deposit decat rates. The OTS also produces a similar analysis using its own
model, based upon data submitted on the Bank's quarterly Thrift Financial
Reports, the results of which may vary from the Bank's internal model primarily
due to differences in assumptions utilized, including estimated loan prepayment
rates, reinvestment rates and deposit decay rates. The following table sets
forth the Bank's NPV as of March 31, 1998.
<TABLE>
<CAPTION>
--------------------------------------------------------- -------------------------------------
NPV as % of Portfolio
Change in Net Portfolio Value Value of Assets
Interest Rates --------------------------------------------------------- -------------------------------------
In Basis Points NPV
(Rate Shock) Amount $ Change $ Change Ratio Change (1)
- --------------------- ---------------- --------------- --------------- ---------------- ----------------
(Dollars in
thousands)
<S> <C> <C> <C> <C> <C>
400 34,954 -31,532 -47.43% 9.18% -649
300 42,956 -23,530 -35.39% 10.96% -470
200 51,207 -15,279 -22.98% 12.71% -296
100 59,069 -7,417 -11.16% 14.27% -139
Static 66,486 0 0.00% 15.67% 0
-100 72,641 6,155 9.26% 16.75% 108
-200 77,760 11,274 16.96% 17.59% 192
-300 83,664 17,178 25.84% 18.54% 287
-400 91,767 25,281 38.02% 19.83% 416
</TABLE>
- ------------------------------------------
(1) Expressed in basis points
As is the case with gap analysis, certain shortcomings are inherent in the
methodology used in the NPV interest rate risk measurements. Modeling changes in
NPV require the making of certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, NPV assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, NPV measurements provide an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual results.
13
<PAGE> 16
F. NON-PERFORMING ASSETS
The following table presents information regarding the Bank's non-performing
assets at the dates indicated:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Non-performing loans:
Non-accrual loans $ 702 $ 774
Restructured loans 112 112
------- -------
Total non-performing loans 814 886
Real estate owned and other repossessed assets 156 322
------- -------
Total non-performing assets $ 970 $ 1,208
======= =======
Total nonperforming loans and troubled debt restructurings
as a percentage of total loans .30% .34%
Total nonperforming assets and troubled debt restructuring
as a percentage of total assets .22% .33%
</TABLE>
G. LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds on a long-term and short-term basis are
deposits, principal and interest payments on loans, mortgage-backed and
investment securities, and FHLB advances. The Bank uses the funds generated to
support its lending and investment activities as well as any other demands for
liquidity such as deposit outflows. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows, mortgage prepayments
and the exercise of call features are greatly influenced by general interest
rates, economic conditions and competition. The Bank has continued to maintain
the required levels of liquid assets as defined by OTS regulations. This
requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's current required liquidity
ratio is 4.0%. At March 31, 1998 and 1997, the Bank's liquidity ratios were
22.32% and 11.19%, respectively.
At March 31, 1998, the Bank exceeded all of its regulatory capital requirements
with a tangible capital level of $53.5 million, or 12.6%, of total adjusted
assets, which is above the required level of $12.8 million, or 3.0%; core
capital of $53.5 million or 12.6% of total adjusted assets, which is above the
required level of $17.0 million, or 4.0%; and risk-based capital of $55.2
million or 24.6% of risk-weighted assets, which is above the required level of
$17.9 million, or 8%.
The Bank's most liquid assets are cash and cash equivalents and its investment
and mortgage-related securities available-for-sale. The levels of these assets
are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At March 31, 1998, cash and cash equivalents
and investment and mortgage-related securities available-for-sale totaled $105.6
million or 23.8% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At March 31, 1998, the Bank had $43.5 million in
advances outstanding from the FHLB, and at December 31, 1997 had an additional
overall borrowing capacity from the FHLB
14
<PAGE> 17
of $180.8 million. Depending on market conditions, the pricing of deposit
products and FHLB advances, the Bank may continue to rely on FHLB borrowings to
fund asset growth.
At March 31, 1998, the Bank had commitments to originate and purchase loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $26.6 million. The Bank anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate accounts, including Individual Retirement Account ("IRA") accounts,
which are scheduled to mature in less than one year from March 31, 1998, totaled
$116.7 million. The Bank expects that substantially all of the maturing
certificate accounts, with the exception of jumbo certificates of deposit, will
be retained by the Bank at maturity. Maturing jumbo certificates will be
evaluated at maturity.
In accordance with the Bank's plans to improve its customer delivery systems and
expand its services it offers, the Bank anticipates that it will be investing in
new computer hardware and software during fiscal 1998 and may expand branch
facilities. The Bank anticipates that during fiscal 1998, it will incur capital
expenditures of approximately $1.5 million to fund such plans. These anticipated
capital expenditures will be funded from the Bank's general corporate funds,
including proceeds from the Conversion and its FHLB advances.
The initial impact of the Conversion on the liquidity and capital resources of
the Bank was significant as it substantially increased the liquid assets of the
Bank and the capital base on which the Bank operates. Additionally, the Bank
invested the substantial majority of its conversion proceeds in readily
marketable investment grade securities which, if liquidity needs developed,
could be sold by the Bank to provide additional liquidity. Further, the
additional capital resulting from the offerings increased the capital base of
the Bank. At March 31, 1998, the Bank had total equity, determined in accordance
with generally accepted accounting principles, of $55.2 million, or 13.3% of
total assets, which approximated the Bank's regulatory tangible capital at that
date of 12.6% of assets. An institution with a ratio of tangible capital to
total assets of greater than or equal to 5% is considered to be
"well-capitalized" pursuant to OTS regulations.
H. YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Many existing application software products were designed to
accommodate only two digits. For example, "96" is stored in the system and
represents 1996. The Bank has been identifying potential problems associated
with the "Year 2000" issue and has implemented a plan designed to ensure that
all software used in connection with the Bank's business will manage and
manipulate data involving the transition with data from 1999 to 2000 without
functional or data abnormality and without inaccurate results related to such
data. The Bank has prepared a critical issues schedule with a timeline and
assigned responsibilities. In addition, the Bank recognizes that its ability to
be Year 2000 compliant is dependent upon the cooperation of its vendors. The
Bank is requiring its computer systems and software vendors to represent that
the products provided are or will be Year 2000 compliant and has planned a
program of testing for compliance. The Bank has received representations from
its primary third party vendors that they will have resolved any Year 2000
problems in their software by December 31, 1998 and anticipates that all of its
vendors also will have resolved any Year 2000 problems in their
15
<PAGE> 18
software by that same date. All Year 2000 issues for the Bank, including
testing, are expected to be addressed by December 31, 1998 and any problems
would be remedied by March 31, 1999. The Bank will also prepare contingency
plans in the event there are any system interruptions. The Bank believes that
its costs related to Year 2000 will not exceed $100,000. There can be no
assurances, however, that such plan or the performance by the Bank's vendors
will be effective to remedy all potential problems. To the extent the Bank's
systems are not fully Year 2000 compliant, there can be no assurance that
potential systems interruptions or the cost necessary to update software would
not have a materially adverse effect on the Bank's business, financial
condition, results of operations and business prospects. Further, any Year 2000
failure on the part of the Bank's customers could result in additional expense
or loss to the Bank. The Bank plans also to work with its customers to address
any potential Year 2000 problems.
I. COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND SEPTEMBER 30, 1997
Total assets increased by $74.2 million, or 20.1%, from $369.2 million at
September 30, 1997 to $443.4 million at March 31, 1998. The growth in assets was
primarily due to the $57.0 million of conversion proceeds net of the $4.8
million Charitable Foundation contribution, which have been used to increase
investments and cash and cash equivalents.
Cash and cash equivalents of $34.4 million at March 31, 1998 increased $21.2
million from September 30, 1997. Investment securities classified as
available-for-sale increased from $44.8 million at September 30, 1997 to $71.2
million at March 31, 1998, a growth of $26.4 million, or 59.0%, while
held-to-maturity securities grew $18.1 million, or 46.4%, to $57.0 million at
March 31, 1998. These increases are attributable to the reinvestment of the
proceeds from the September 30, 1997 sale of securities, and the recent stock
offering.
Loans receivable increased $6.1 million, or 2.3%, to $267.5 million at March 31,
1998. This increase is mainly due to a $5.3 million increase in home equity
loans and lines of credit due to increased marketing efforts and competitive
pricing of such loans.
Accrued interest receivable increased $668,000, or 30.8%, to $2.8 million at
March 31, 1998. This was due to an increase in loan receivables and investment
and mortgage-related security purchases.
Prepaid expenses and other assets increased $1.5 million, or 95.5%, to $3.1
million at March 31, 1998. This increase was primarily the result of a $1.5
million deferred tax asset at March 31, 1998, resulting from the tax effect of
the $4.8 million charitable contribution to the Foundation.
Total deposits decreased $2.5 million, or 0.8%, to $311.7 million at March 31,
1998. The decrease in deposits is a result of a $5.2 million decrease in
certificate of deposit balances from $192.7 million at September 30, 1997 to
$187.5 million at March 31, 1998, primarily as a result of maturities of jumbo
certificates of deposit which were not renewed. Management determined there were
opportunities to obtain FHLB advances at a lower effective rate than required to
retain the jumbo certificates of deposit. The decrease in certificates of
deposit was partially offset by an increase of $2.1 million, or 24.7%, in
non-interest bearing demand accounts due primarily to an increase in business
checking accounts resulting from a more active solicitation of such accounts.
16
<PAGE> 19
FHLB advances increased $20.0 million from $23.5 million at September 30, 1997
to $43.5 million at March 31, 1998. This was a result of management's
determination to place increased emphasis on the utilization of FHLB borrowings
to fund asset growth, particularly investments in mortgage-related and
investment securities and home equity consumer loans. FHLB borrowings can be
invested at yields higher than the cost of the borrowed funds thereby increasing
net interest income.
Total equity increased $55.4 million to $84.0 million at March 31, 1998. This
increase in equity resulted primarily from the addition of common stock of
$64,000 and additional paid-in capital of $62.0 million, as a result of the
conversion and offering of stock, net of the establishment of a $5.1 million
liability for unearned ESOP.
J. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND MARCH 31, 1997
GENERAL. The Company had a net loss of $2.5 million compared to net income of
$643,000 for the three months ended March 31, 1998 and March 31, 1997,
respectively. This loss was primarily due to a one-time $4.8 million
non-recurring pre-tax ($3.1 million after-tax) expense relating to the funding
of First Federal Charitable Foundation ("the Foundation") in connection with the
Conversion. This was partially offset by increases in interest income and
non-interest income. The Company's core net earnings (quarterly earnings
excluding the after-tax impact of the non-recurring contribution) were $651,000
for the quarter ended March 31, 1998.
INTEREST INCOME. Total interest income increased by $676,000, or 10.5%, from
$6.4 million for the three months ended March 31, 1997 to $7.1 million for the
three months ended March 31, 1998. This was primarily due to a $41.2 million, or
11.8%, increase in the average balance of interest earning assets and a slight
increase in the weighted average yield on interest earning assets. Interest
income on real estate loans increased $102,000, or 3.0%, from $3.4 million to
$3.5 million for the three months ended March 31, 1997 and March 31, 1998,
respectively, primarily due to a $4.4 million increase in the average balance of
one-to-four family loans. Interest income on consumer loans increased $160,000
from $1.2 million for the period ending March 31, 1997 to $1.3 million. This was
principally due to increases in the average balance of consumer loans from $57.4
million to $63.6 million for the three months ended March 31, 1997 and March 31,
1998, respectively, an increase of $6.2 million, or 10.8%. Interest income on
securities increased $335,000, or 22.0%, to $1.9 million for the three months
ended March 31, 1998. This increase was the result of a $398,000, or 51.7%,
increase in interest income on investment securities relating to a $16.5
million, or 37.3%, increase in average balances of investment securities. This
increase was offset by a $63,000 decrease in interest income on mortgage-related
securities primarily due to a $5.9 million, or 11.7%, decrease in average
balances of mortgage-related securities caused by an increase in returns of
principal.
INTEREST EXPENSE. Interest expense increased $332,000, or 9.8%, from $3.4
million to $3.7 million for the three months ended March 31, 1997 and March 31,
1998, respectively. The increase in interest expense was primarily the result of
a $24.9 million increase in the average balance of FHLB advances and other
borrowings, which increased from $22.2 million at March 31, 1997 to $47.1
million at March 31, 1998, and a nine basis point increase in the weighted
average rate paid on such borrowings from 5.33% to 5.42% for the three months
ended March
17
<PAGE> 20
31, 1997 and March 31, 1998, respectively. The increase in FHLB advances
reflects management's determination to more heavily utilize FHLB advances to
fund asset growth. The increase in interest expense also resulted from increased
interest expense on certificates of deposit, which was the result of a nine
basis point rate increase. This increase was offset by a $421,000 decrease in
average balances of certificates of deposit. These increases were also offset by
a decrease in interest expense on savings accounts and checking accounts of
$33,000, or 7.5%, and $11,000, or 5.5%, respectively.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses for the three
months ended March 31, 1998 was $219,000, compared to $57,000 for the three
months ended March 31, 1997. The increase in the provision for loan losses and
corresponding increase in the Bank' allowance for loan losses reflected a change
in management's strategic direction and a decision to give a greater
consideration to the allowance for loan loss ratio levels of peer group
institutions. The change in strategic direction changed the composition of the
Bank's loan portfolio by increasing the levels of consumer, commercial, and
construction loans. The bank anticipates that, as a result of its increasing
emphasis on consumer, commercial, multi-family and commercial real estate and
construction lending, in the future, it may need to maintain an allowance for
loan losses at a higher level than it has maintained in previous periods to
offset any greater risk resulting from the shifting composition of its loan
portfolio.
NON-INTEREST INCOME. Non-interest income increased $24,000 from $150,000 to
$174,000 for the three months ended March 31, 1997 and March 31, 1998,
respectively. The increase in non-interest income is due to an increase in
service charges and other fees from $145,000 to $176,000 for the three months
ended March 31, 1997 and March 31, 1998, respectively, primarily due to the
implementation of surcharges on ATM transactions in late February 1997.
NON-INTEREST EXPENSE. Total non-interest expense increased from $2.2 million to
$7.2 million for the three months ended March 31, 1997 and March 31, 1998,
respectively, due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation. The increase was also attributable to
the increases in compensation and employee benefits of $196,000, or 15.5%, to
$1.5 million for the three months ended March 31, 1998, from $1.3 million for
the comparable period in 1997, primarily due to staff additions relating to the
opening of the Mountaintop branch, as well as, increases in salaries and benefit
costs.
INCOME TAXES. The Company had an income tax benefit of $1.4 million for the
three months ended March 31, 1998, compared to an expense of $284,000 for the
three months ended March 31, 1997 resulting in an effective tax rate of (35.7%)
for the three months ended March 31, 1998. The decrease in income tax expense
was attributable to the net operating loss relating to the one-time charitable
donation to the Foundation.
K. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997.
GENERAL. For the six months ended March 31, 1998, the Company reported a net
loss of $1.9 million, compared to $1.3 million net income for the same period in
1997. This loss was due to the one-time $4.8 million non-recurring pre-tax ($3.1
million after-tax) expense relating to the funding of the Foundation in
connection with the Conversion. The Company's core net earnings
18
<PAGE> 21
(quarterly earnings excluding the after-tax impact of the non-recurring
contribution) were $1.2 million for the six months ended March 31, 1998.
INTEREST INCOME. Total interest income increased $1.0 million, or 7.7%, from
$13.0 million to $14.0 million for the six months ended March 31, 1997 and March
31, 1998, respectively, primarily due to a $29.8 million, or 8.5%, increase in
the average balance of interest earning assets and a slight increase in the
weighted average yield on interest earning assets. Interest income on real
estate loans increased $244,000, or 3.5%, to $7.1 million for the six months
ended March 31, 1998, primarily due to a $5.9 million increase in the average
balance of one-to-four family loans. Interest income on consumer loans increased
$284,000, or 11.9%, to $2.7 million for the six months ended March 31, 1998.
This was principally due to a $5.9 million increase in the average balance of
consumer loans from $57.0 million at March 31, 1997 to $62.9 million at March
31, 1998. Interest income on securities increased by $332,000, or 10.5%, to $3.5
million for the six months ended March 31, 1998. This increase was primarily due
to a $9.4 million, or 19.8%, increase in the average balance of such securities.
Interest income on mortgage-related securities reflected a modest decrease of
$102,000 primarily due to a $5.2 million decrease in the average balances from
$50.3 million at March 31, 1997 to $45.1 million at March 31, 1998. .
INTEREST EXPENSE. Interest expense increased by $528,000, or 7.7%, from $6.9
million to $7.4 million for the six months ended March 31, 1997 and March 31,
1998, respectively. The increase in interest expense was primarily the result of
a $19.1 million, or 89.7%, increase in the average balance of FHLB advances,
which increased from $21.3 million at March 31, 1997 to $40.4 million at March
31, 1998, and a slight increase in the weighted average rate paid on such
borrowings from 5.34% at March 31, 1997 to 5.49% at March 31, 1998. The increase
in FHLB advances reflects management's determination to more heavily utilize
FHLB advances to fund asset growth. This increase in interest expense was offset
by an overall decrease in interest expense on deposits primarily due to a $1.2
million, or 1.7%, decline in the average balance of savings accounts, combined
with a 20 basis point reduction in the weighted average yield of such accounts.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses was $487,000 for
the six months ended March 31, 1998, compared to $89,000 for the six months
ended March 31, 1997. The increase in the provision for loan losses and
corresponding increase in the Bank's allowance for loan losses reflected a
change in management's strategic direction of the loan portfolio and a decision
to give a greater consideration to the allowance for loan loss ratio levels of
peer group institutions. The change in strategic direction changed the
composition of the Bank's loan portfolio by increasing the levels of consumer,
commercial and construction loans. Such loans generally bear a greater degree of
credit risk than one-to-four family loans. The bank anticipates that, as a
result of its increasing emphasis on consumer, commercial, multi-family and
commercial real estate and construction lending, in the future, it may need to
maintain an allowance for loan losses at a higher level than it has maintained
in previous periods to offset any greater risk resulting from the shifting
composition of its loan portfolio.
NON-INTEREST INCOME. The Bank experienced a $35,000 increase in non-interest
income from $298,000 to $333,000 for the six months ended March 31, 1997 and
March 31, 1998, respectively, due primarily to an increase in service charges
and fee income, offset by losses incurred on the sale of real estate owned
(REO). Service charges and fee income increased
19
<PAGE> 22
$50,000, or 16.5%, primarily due to implementation of surcharges on ATM
transactions in late February 1997. Losses on the sale of REO properties
increased $23,000 for the six months ended March 31, 1998 due to the disposal of
more properties during the first six months of fiscal year 1998.
NON-INTEREST EXPENSE. Total non-interest expense increased from $4.5 million to
$9.5 million for the six months ended March 31, 1997 and March 31, 1998,
respectively, due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation
INCOME TAXES. The Company had an income tax benefit of $1.1 million for the six
months ended March 31, 1998 compared to an expense of $569,000 for the six
months ended March 31, 1997, resulting in an effective tax rate of (36.5%) for
the six months ended March 31, 1998. The decrease in income tax expense was
attributable to a net operating loss relating to the one-time charitable
donation to the Foundation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Part I, Item 2, Sections C, D and E on
pages 11-13, inclusive.
20
<PAGE> 23
Part II - OTHER INFORMATION
1. Legal Proceedings
Not applicable.
2. Changes in Securities
Not applicable
3. Defaults Upon Senior Securities
Not applicable.
4. Submission of Matters to a Vote of Security Holders
Not applicable.
5. Other information
Not applicable
6. Exhibits and Reports on Form 8-K
(A) Exhibits
2.1 Amended Plan of Conversion (including the Federal
Stock Charter and Bylaws of First Federal Bank).*
3.1 Certificate of Incorporation of Northeast Pennsylvania
Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.*
10.1 Form of First Federal Bank Employee Stock Ownership
Plan and Trust*
10.2 Draft ESOP Loan Commitment Letter and ESOP Loan
Documents*
10.3 Form of Proposed Employment Agreement between First
Federal Bank and certain executive officers*
10.4 Form of Proposed Employment Agreement between
Northeast Pennsylvania Financial Corp. and certain
executive officers*
10.5 Form of Proposed Change in Control Agreement between
First Federal Bank and certain executive officers*
10.6 Form of Proposed Change in Control Agreement between
Northeast Pennsylvania Financial Corporation and
certain executive officers*
21
<PAGE> 24
10.7 Form of Proposed First Federal Bank Employee Severance
Compensation Plan*
10.8 Form of First Federal Bank Supplemental Executive
Retirement Plan*
10.9 Form of First Federal Bank Management Supplemental
Executive Retirement Plan*
11.0 Statement regarding Computation of Per Share
Earnings**
27.0 Financial Data Schedule (filed herewith)
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, and any
amendments thereto, Registration No. 333-43281.
** Not applicable as the Company did not have earnings in
quarter.
(B) Reports on Form 8-K
Not applicable.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
Date: May 13, 1998 By: /s/ E. Lee Beard
-----------------------------
E. Lee Beard
President and Chief Executive
Officer
Date: May 13, 1998 By: /s/ Patrick J. Owens, Jr.
-----------------------------
Patrick J. Owens, Jr.
Chief Financial Officer and
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE UNAUDITED FINANCIAL
STATEMENTS CONTAINED THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,994
<INT-BEARING-DEPOSITS> 18,449
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,175
<INVESTMENTS-CARRYING> 56,987
<INVESTMENTS-MARKET> 56,471
<LOANS> 267,540
<ALLOWANCE> 1,734
<TOTAL-ASSETS> 443,402
<DEPOSITS> 311,660
<SHORT-TERM> 3,223
<LIABILITIES-OTHER> 4,038
<LONG-TERM> 40,507
0
0
<COMMON> 64
<OTHER-SE> 83,910
<TOTAL-LIABILITIES-AND-EQUITY> 443,402
<INTEREST-LOAN> 5,258
<INTEREST-INVEST> 1,168
<INTEREST-OTHER> 688
<INTEREST-TOTAL> 7,114
<INTEREST-DEPOSIT> 3,084
<INTEREST-EXPENSE> 3,713
<INTEREST-INCOME-NET> 3,401
<LOAN-LOSSES> (219)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,233
<INCOME-PRETAX> (3,877)
<INCOME-PRE-EXTRAORDINARY> (3,877)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,491)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
<YIELD-ACTUAL> 7.49
<LOANS-NON> 702
<LOANS-PAST> 0
<LOANS-TROUBLED> 112
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,272
<CHARGE-OFFS> (27)
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 1,734<F1>
<ALLOWANCE-DOMESTIC> 1,245
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 489<F2>
<FN>
<F1>ALLOWANCE FOR LOANS LOSS AT END OF PERIOD INCLUDES AN INCREASE IN THE ALLOWANCE
THROUGH THE PROVISION FOR LOAN LOSSES.
<F2>ALL UNALLOCATED IS FOR DOMESTIC LOANS.
</FN>
</TABLE>
