<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 June 30, 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)
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<CAPTION>
<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
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 August 12, 1998.
<PAGE> 2
TABLE OF CONTENTS
Item
No.
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Page
Number
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PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
June 30, 1998 (unaudited) and September 30, 1997....................... 1
Consolidated Statements of Operations for the Three Months Ended
June 30, 1998 and 1997 (unaudited)..................................... 2
Consolidated Statements of Operations for the Nine Months Ended
June 30, 1998 and 1997 (unaudited)..................................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 1998 and 1997(unaudited)...................................... 4-5
Notes to Consolidated Financial Statements (unaudited)................. 6-10
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 11-21
Item 3 Quantitative and Qualitative Disclosures about Market Risk............. 21
PART II - OTHER INFORMATION
1 Legal Proceedings..................................................... 22
2 Changes in Securities and Use of Proceeds............................. 22
3 Defaults Upon Senior Securities....................................... 22
4 Submission of Matters to a Vote of Security Holders................... 22
5 Other Information..................................................... 22
6 Exhibits and Reports on Form 8 - K.................................... 22-25
Signatures
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statements of Financial Condition
June 30, 1998 (unaudited) and September 30, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
--------- ---------
Assets (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 10,119 $ 13,214
Securities held-to-maturity (estimated fair value of $67,504 in
1998 and $38,869 in 1997) 67,166 38,925
Securities available-for-sale 106,286 44,773
Loans (less allowance for loan losses of $2,022 for 1998 and $1,272
for 1997) 279,696 261,469
Accrued interest receivable 3,074 2,169
Real estate owned, net 145 319
Property and equipment, net 8,091 6,762
Other assets 3,230 1,611
--------- ---------
Total assets $ 477,807 $ 369,242
========= =========
Liabilities and Equity
Deposits $ 322,872 $ 314,123
Federal Home Loan Bank advances 65,503 23,516
Other borrowings 349 92
Advances from borrowers and insurance 1,257 477
Accrued interest payable 720 745
Other liabilities 2,148 1,751
--------- ---------
Total liabilities $ 392,849 $ 340,704
Preferred stock ($.01 par value; 2,000,000 authorized shares;
0 shares issued) -- --
Common stock ($.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 26,313 27,255
Unrealized gain on available-for-sale securities, net 1,764 1,283
--------- ---------
Total equity $ 84,958 $ 28,538
--------- ---------
Total liabilities and equity $ 477,807 $ 369,242
========= =========
</TABLE>
1
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statements of Operations
For the Three Months Ended June 30, 1998 and 1997 (unaudited)
(in thousands)
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<CAPTION>
For the Three months ended
June 30, 1998 June 30, 1997
------------- --------------
<S> <C> <C>
Interest Income:
Loans $ 5,445 $ 5,071
Mortgage-related securities 899 905
Investment securities:
Taxable 1,224 722
Non-taxable 367 73
------- -------
Total interest income 7,935 6,771
Interest Expense:
Deposits 3,149 3,179
Federal Home Loan Bank advances and other 619 430
------- -------
Total interest expense 3,768 3,609
Net interest income 4,167 3,162
Provision for loan losses 292 55
------- -------
Net interest income after provision for loan losses 3,875 3,107
Non-interest Income:
Service charges and other fees 223 181
Gain (loss) on sale of:
Real estate owned (38) (23)
Loans 14 2
Other -- (3)
------- -------
Total non-interest income 199 157
Non-interest Expense:
Salaries and net employee benefits 1,622 1,310
Occupancy costs 390 345
Federal deposit insurance premiums 70 72
Data processing 72 92
Professional fees 94 65
Federal Home Loan Bank service charges 108 69
Charitable contributions 25 6
Other 328 410
------- -------
Total non-interest expense 2,709 2,369
Income before income taxes 1,365 895
Income taxes 374 291
------- -------
Net income $ 991 $ 604
======= =======
Earnings per share - basic .17 N/A
======= =======
Earnings per share - diluted .17 N/A
======= =======
</TABLE>
2
<PAGE> 5
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statements of Operations
For the Nine Months Ended June 30, 1998 and 1997 (unaudited)
(in thousands)
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<CAPTION>
For the Nine Months Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Interest Income:
Loans $ 15,971 $ 14,905
Mortgage-related securities 2,299 2,406
Investment securities:
Taxable 2,993 2,281
Non-taxable 701 183
-------- --------
Total interest income 21,964 19,775
Interest Expense:
Deposits 9,464 9,504
Federal Home Loan Bank advances and other 1,726 998
-------- --------
Total interest expense 11,190 10,502
Net interest income 10,774 9,273
Provision for loan losses 779 137
-------- --------
Net interest income after provision for loan losses 9,995 9,136
Non-interest Income:
Service charges and other fees 576 484
Gain (loss) on the sale of:
Real estate owned (72) (34)
Loans 17 7
Available-for-sale securities 9 --
Other 2 (3)
-------- --------
Total non-interest income 532 454
Non-interest Expense:
Salaries and net employee benefits 4,306 3,807
Occupancy costs 1,149 1,075
Federal deposit insurance premiums 213 296
Data processing 208 274
Professional fees 214 192
Federal Home Loan Bank service charges 286 195
Charitable contributions(1) 4,924 44
Other 905 955
-------- --------
Total non-interest expense 12,205 6,838
Income (loss) before income taxes (1,678) 2,752
Income taxes (736) 861
-------- --------
Net income (loss) $ (942) $ 1,891
======== ========
Earnings per share - basic (.16) N/A
======== ========
Earnings per share - diluted (.16) N/A
======== ========
</TABLE>
(1) June 30, 1998 includes a charitable contribution of $4,761,000 made to
First Federal Charitable Foundation
3
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
Consolidated Statement of Cash Flows
For the Nine Months ended June 30, 1998 and 1997 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30,
1998 1997
--------- ---------
<S> <C> <C>
Operating Activities:
Net Income (loss) ($ 942) $ 1,891
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (Recovery) for REO loss (68) 33
Provision for loan losses 779 137
Depreciation 451 489
Deferred income tax benefit (1,888) (134)
Funding of First Federal Charitable Foundation 4,761 --
Amortization and accretion on:
Held-to-maturity securities 45 42
Available-for-sale securities 130 57
Amortization of deferred loan fees (216) (152)
(Gain) loss on sale of:
Real estate loans acquired through foreclosure 72 34
Loans (17) (7)
Available-for-sale securities (9) --
Gain (loss) on disposal of property and equipment (2) 3
Changes in assets and liabilities:
Increase in accrued interest receivable (905) (47)
Increase in other assets (339) (198)
Increase (decrease) in accrued interest payable (25) 165
Increase in accrued income taxes payable 751 1,099
Increase (decrease) in other liabilities 87 (1,747)
--------- ---------
Net cash provided by operating activities 2,665 1,665
Investing Activities:
Loan origination and principal payments on loans, net (23,673) (14,195)
Proceeds from sale of:
Available-for-sale securities -- 8,402
Real estate acquired through foreclosure 256 200
Loans 4,814 835
Proceeds from repayments of held-to-maturity securities 17,535 10,901
Proceeds from repayments of available-for-sale securities 22,070 4,903
Proceeds from disposal of fixed assets 2 1
Purchase of:
Held-to-maturity securities (45,821) (3,604)
Available-for-sale securities (81,834) (21,949)
Office properties and equipment (1,780) (314)
Federal Home Loan Bank stock (1,222) (95)
--------- ---------
Net cash used in investing activities (109,653) (14,915)
Financing Activities:
Net increase in deposit accounts 8,749 3,488
Net increase (decrease) in Federal Home Loan Bank short-term advances (8,000) 2,000
Borrowings of Federal Home Loan Bank long-term advances 50,000 7,000
Repayments of Federal Home Loan Bank long-term advances (13) (13)
Net increase in advances from borrowers for taxes and insurance 780 610
</TABLE>
4
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<CAPTION>
For the Nine Months Ended
June 30,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Net increase in other borrowings 257 --
Net proceeds from issuance of common stock 52,120 --
-------- --------
Net cash provided by financing activities 103,893 13,085
Decrease in cash and cash equivalents (3,095) (165)
Cash and cash equivalents, beginning of year 13,214 4,045
-------- --------
Cash and cash equivalents, end of year 10,119 3,880
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 11,215 10,337
======== ========
Income taxes 400 370
======== ========
Supplemental disclosure - non-cash information:
Transfer from loans to real estate owned 86 170
======== ========
</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 nine months ended June 30, 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., Abstractors, Inc.,
and First Federal Bank. First Federal Bank and Abstractors, Inc. are
wholly-owned subsidiaries of Northeast Pennsylvania Financial Corp.
Abstractor's Inc. was purchased June 30, 1998 for a nominal fee. 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
Earnings per share, basic and diluted, were $0.17 and ($0.16) for the
three and nine months ended June 30, 1998. Due to the Bank's recent
conversion and formation of the Company, earnings per share figures for
prior year periods are not applicable.
6
<PAGE> 9
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION 1998 1997 1998 1997
----------- ----------- ----------- -----------
Numerator: $ 991 $ -- $ (942) $ --
Denominator:
Weighted average common
shares outstanding 5,930,302 -- 5,930,302 --
----------- ----------- ----------- -----------
Basic EPS $ .17 N/A $ (.16) N/A
========== =========== =========== ===========
DILUTED EPS COMPUTATION 1998 1997 1998 1997
----------- ----------- ----------- -----------
Numerator: $ 991 $ -- $ (942) $ --
Denominator:
Weighted average common
shares outstanding 5,930,302 -- 5,930,302 --
----------- ----------- ----------- -----------
Diluted EPS $ .17 N/A $ (.16) N/A
========== =========== =========== ===========
</TABLE>
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.
7
<PAGE> 10
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
eliminates 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated
as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of certain foreign currency exposures. This
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier adoption is permitted. The
Company has not yet determined the impact, if any, of this Statement,
including its provisions for the potential reclassifications of
investment securities, on earnings, financial condition or equity.
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
8
<PAGE> 11
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 regulatory
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 June 30, 1998, there were no shares of
preferred stock issued.
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<TABLE>
<CAPTION>
4. Loans
Loans are summarized as follows: June 30, September 30,
1998 1997
--------- ---------
<S> <C> <C>
Real Estate loans: (unaudited)
One-to-four family $ 179,189 $ 179,101
Multiple family and commercial 9,227 6,701
Construction 3,160 5,818
--------- ---------
Total real estate loans 191,576 191,620
--------- ---------
Consumer Loans:
Home equity loans and lines of credit 52,817 41,278
Automobile 23,764 13,678
Education 2,373 2,348
Unsecured lines of credit 1,701 1,310
Other 1,115 3,229
--------- ---------
Total consumer loans 81,770 61,843
--------- ---------
Commercial loans 9,936 10,775
--------- ---------
Total loans 283,282 264,238
--------- ---------
Less:
Allowance for loan losses (2,022) (1,272)
Deferred loan origination fees (1,564) (1,497)
--------- ---------
Total loans, net $ 279,696 $ 261,469
========= =========
</TABLE>
Rollforward of allowance for loan losses:
<TABLE>
<CAPTION>
For the nine
months ended For the year ended
June 30, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
Balance, beginning of period 1,272 730
Charge-offs (36) (132)
Recoveries 7 23
Provision for loan losses 779 651
------- -------
Balance, end of period $ 2,022 $ 1,272
======= =======
</TABLE>
5. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1997
------------- ------------------
Percent of Percent of
Amount Total Amount Total
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) $ 71,342 22.1% $ 71,779 22.8%
Money market accounts 14,789 4.6% 13,821 4.4%
Certificates of deposit less than $100,000 164,339 51.0% 161,844 51.5%
Certificates of deposit greater than $100,000(1) 29,533 9.1% 30,892 9.9%
NOW Accounts 32,390 10.0% 27,302 8.7%
Non-interest bearing deposits 10,479 3.2% 8,485 2.7%
-------- ----- -------- -----
Total deposits at end of period $322,872 100% $314,123 100%
======== ===== ======== =====
</TABLE>
(1) Deposit balances in excess of $100,000 are not federally insured.
10
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ITEM 2 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
The Company is the holding company for First Federal Bank (the "Bank"), a
federally chartered capital stock savings bank 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, and advertising and business promotion 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 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
Federal Home Loan Bank of Pittsburgh ("FHLB"); and investing in investment and
mortgage-related securities having shorter estimated durations; (iv) meeting the
banking needs of its customers
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<PAGE> 14
through expanded products and improved delivery 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. During the
quarter ended June 30, 1998, the Bank completed the purchase of $6.2 million of
new and used automobile loans from a local lending institution. 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 hold such loans in its
portfolio.
The Bank has entered into an agreement with T.H.E. Financial Group, LTD, to
provide customers with alternative investment opportunities. Also, during the
quarter, Northeast Pennsylvania Financial Corp. entered into an agreement and
completed the purchase of Abstractors, Inc., a local title insurance agency.
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 market, fixed-rate
mortgage loans originated with terms greater than 15 years, which exceeded the
first 20% of originations in the given year, while retaining the servicing
rights.
12
<PAGE> 15
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 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 June 30, 1998, the Bank's
cumulative one year gap was a positive 5.2% 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.
June's interest rate sensitivity gap reflected the results of the investment of
the proceeds from the sale of the Company's stock, and the impact of the Bank's
purchase of investments utilizing FHLB advances. 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
13
<PAGE> 16
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.
E. NET PORTFOLIO VALUE
The Bank's interest rate sensitivity is primarily monitored by management
through the use of a model which estimates 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 decay 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 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 June
30, 1998.
<TABLE>
<CAPTION>
Change in NPV as % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis Points --------------------------------------------------------- -------------------------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change (1)
- --------------------- ---------------- --------------- --------------- ---------------- ----------------
(Dollars in
thousands)
<S> <C> <C> <C> <C> <C>
400 48,515 -19,914 -29.1% 11.57% -333
300 54,137 -14,292 -20.9% 12.60% -230
200 59,797 -8,632 -12.6% 13.59% -131
100 64,774 -3,655 -5.3% 14.39% -51
Static 68,429 0 0.0% 14.90% 0
-100 70,920 2,491 3.6% 15.17% 27
-200 72,186 3,756 5.5% 15.21% 31
-300 74,278 5,849 8.5% 15.38% 48
-400 77,550 9,121 13.3% 15.73% 83
</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 requires 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.
14
<PAGE> 17
F. NON-PERFORMING ASSETS
The following table presents information regarding the Bank's non-performing
assets at the dates indicated:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------ ------
<S> <C> <C>
Non-performing loans:
Non-accrual loans $ 954 $ 774
Restructured loans -- 112
------ ------
Total non-performing loans 954 886
Real estate owned and other repossessed assets 156 322
------ ------
Total non-performing assets $1,110 $1,208
====== ======
Total nonperforming loans and troubled debt restructuring as
a percentage of total loans .34% .34%
Total nonperforming assets and troubled debt restructuring
as a percentage of total assets .23% .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 June 30, 1998 and 1997, the Bank's liquidity ratios were
14.62% and 9.74%, respectively.
At June 30, 1998, the Bank exceeded all of its regulatory capital requirements
with a tangible capital level of $54.2 million, or 12.1%, of total adjusted
assets, which is above the required level of $13.4 million, or 3.0%; core
capital level of $54.2 million or 12.1% of total adjusted assets, which is above
the required level of $17.9 million, or 4.0%; and risk-based capital of $56.3
million or 24.2% of risk-weighted assets, which is above the required level of
$18.6 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 June 30, 1998, cash and cash equivalents
and investment and mortgage-related securities available-for-sale totaled $116.4
million or 24.4% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At June 30, 1998, the Bank had $65.5 million in
advances outstanding from the FHLB, and had an additional overall borrowing
capacity from the FHLB of $229.5 million.
15
<PAGE> 18
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 June 30, 1998, the Bank had commitments to originate and purchase loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $28.6 million. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificate accounts,
including Individual Retirement Account ("IRA") accounts, which are scheduled to
mature in less than one year from June 30, 1998, totaled $123.5 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. At June 30, 1998, the Bank had $25.8 million in jumbo certificates
which will be evaluated at maturity.
To improve its customer delivery systems and expand its services, the Bank
anticipates 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 June 30, 1998, the Bank had total equity, determined in accordance
with generally accepted accounting principles, of $56.0 million, or 12.5% of
total assets, which approximated the Bank's regulatory tangible capital at that
date of 12.1% 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 software by that
same date. All Year 2000 issues for the Bank, including testing, are expected to
16
<PAGE> 19
be addressed by December 31, 1998, with the goal of correcting any problems by
March 31, 1999. The Bank will also prepare contingency plans in the event there
are any system interruptions. The Bank believes that its total 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, and has
implemented a Customer Awareness Program which will help to alleviate any
concerns there may be regarding the Bank's Year 2000 compliance.
I. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND SEPTEMBER 30, 1997
Total assets increased by $108.6 million, or 29.4%, from $369.2 million at
September 30, 1997 to $477.8 million at June 30, 1998. The growth in assets was
primarily due to increases in investments and loans receivable.
Investment securities classified as available-for-sale increased from $44.8
million at September 30, 1997 to $106.3 million at June 30, 1998, a growth of
$61.5 million, while held-to-maturity securities grew $28.2 million, or 72.6%,
to $67.2 million at June 30, 1998. These increases were attributable to the
reinvestment of the proceeds from the September 30, 1997 sale of securities, the
Conversion, and additional FHLB advances. Cash and cash equivalents of $10.1
million at June 30, 1998 decreased $3.1 million from September 30, 1997 due to
the purchase of additional investment securities.
Loans receivable increased $18.2 million, or 6.97%, to $279.7 million at June
30, 1998. This was primarily due to a $10.5 million increase in home equity
loans resulting from increased marketing efforts and competitive pricing of such
loans, combined with the purchase of $6.2 million in indirect auto loans from a
local financial institution.
Accrued interest receivable increased $905,000, or 41.7%, to $3.1 million at
June 30, 1998. This was due to an increase in loans receivable and investment
and mortgage-related security purchases.
Property and equipment increased $1.3 million, or 19.6%, to $8.1 million at June
30, 1998. This increase was primarily the result of the construction of a new
branch in Mountaintop and the purchase of a new site for the relocation of the
Columbia Mall branch office.
Prepaid expenses and other assets increased $1.6 million, to $3.2 million at
June 30, 1998. This increase was primarily the result of a $1.3 million deferred
tax asset at June 30, 1998, resulting from the tax effect of the $4.8 million
charitable contribution to the Foundation.
Total deposits increased $8.7 million, or 27.9%, to $322.9 million at June 30,
1998. The increase in deposits was the result of an $8.0 million increase in
checking accounts from $49.7 million at September 30, 1997 to $57.7 million at
June 30, 1998, primarily as a result of a $3.4
17
<PAGE> 20
million, or 19.8% increase in NOW accounts combined with a $2.0 million, or
43.6% increase in non-interest bearing demand accounts resulting from a more
active solicitation of such accounts.
FHLB advances increased $42.0 million from $23.5 million at September 30, 1997
to $65.5 million at June 30, 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 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 $56.4 million to $85.0 million at June 30, 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, net of the establishment of a $5.1 million liability for unearned
ESOP shares.
J. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30,
1998 AND JUNE 30, 1997
GENERAL. The Company had net income of $991,000 for the three months ended June
30, 1998, compared to net income of $604,000 for the three months ended June 30,
1997, an increase of $387,000 or 64%. This increase was primarily attributable
to a $1.2 million rise in interest income, offset by increases in non-interest
expenses, provision for loan losses, and interest expenses of $340,000,
$237,000, and $160,000, respectively.
INTEREST INCOME. Total interest income increased by $1.2 million , or 17.2%,
from $6.8 million for the three months ended June 30, 1997 to $7.9 million for
the three months ended June 30, 1998. This was primarily due to a $102.1
million, or 28.1%, increase in the average balance of interest earning assets,
offset by a slight decrease in the weighted average yield on interest earning
assets. Interest income on consumer loans increased $268,000 from $1.3 million
for the period ending June 30, 1997 to $1.5 million principally due to increases
in the average balance of consumer loans from $59.4 million to $72.3 million for
the three months ended June 30, 1997 and June 30, 1998, respectively, an
increase of $12.9 million, or 21.2%. Interest income on securities increased
$791,000, or 46.6%, to $2.5 million for the three months ended June 30, 1998
primarily due to a $70.6 million increase in average balances of investment
securities.
INTEREST EXPENSE. Interest expense increased $160,000, or 4.4%, from $3.6
million to $3.8 million for the three months ended June 30, 1997 and June 30,
1998, respectively. The increase in interest expense was primarily the result of
a $15.2 million increase in the average balance of FHLB advances and other
borrowings, which increased from $31.0 million at June 30, 1997 to $46.2 million
at June 30, 1998, the increase in FHLB advances reflects management's
determination to more heavily utilize FHLB advances to fund asset growth. This
increase was offset by a decrease in interest expense on savings accounts, which
was the result of a $1.4 million decrease in the average balances of these
accounts, combined with a 25 basis point decrease.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses for the three
months ended June 30, 1998 was $292,000, compared to $55,000 for the three
months ended June 30, 1997. The increase in the provision for loan losses and
corresponding increase in the Bank' allowance
18
<PAGE> 21
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 $42,000 from $157,000 to
$199,000 for the three months ended June 30, 1997 and June 30, 1998,
respectively. The increase in non-interest income was primarily due to an
increase in service charges and other fees from $97,600 to $126,000 for the
three months ended June 30, 1997 and June 30, 1998, respectively, primarily due
to increased customer activity on the various deposit accounts.
NON-INTEREST EXPENSE. Total non-interest expense increased from $2.4 million to
$2.7 million for the three months ended June 30, 1997 and June 30, 1998,
respectively. This increase was due primarily to an increase in compensation and
employee benefits of $312,000, or 23.9%, to $1.6 million for the three months
ended June 30, 1998, from $1.3 million for the comparable period in 1997 due to
staff additions relating to the opening of the Mountaintop branch, as well as,
the establishment of the ESOP.
INCOME TAXES. The Company had an income tax provision of $374,000 for the three
months ended June 30, 1998, compared to an expense of $291,000 for the three
months ended June 30, 1997 resulting in effective tax rates of 27.4% and 32.5%,
respectively. The increase in income tax expense was attributable to the
increase in income before taxes for the three months ended June 30, 1998. The
decline in the effective tax rate was caused by the effect of a state tax credit
granted, in May 1998, under the Neighborhood Assistance Act.
K. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1998
AND JUNE 30, 1997.
GENERAL. For the nine months ended June 30, 1998, the Company reported a net
loss of $942,000, compared to $1.9 million net income for the same period in
1997. This loss was primarily 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, offset by a $1.5 million, or
16.2%, increase in net interest income. The Company's core net earnings (year to
date earnings excluding the after-tax impact of the non-recurring contribution)
were $2.2 million for the nine months ended June 30, 1998.
INTEREST INCOME. Total interest income increased $2.2 million, or 11.1%, from
$19.8 million to $22.0 million for the nine months ended June 30, 1997 and June
30, 1998, respectively, primarily due to a $94.7 million, or 26.7%, 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 $283,000, or 27.4%, to $10.6 million for the nine months
ended June 30, 1998, primarily due to a $4.3 million increase in the average
balance of one-to-four family loans. Interest income on consumer loans increased
$552,000, or 15.0%, to $4.2 million for the nine months ended June 30, 1998
principally due to an $8.3 million increase in the average balance of
19
<PAGE> 22
consumer loans from $57.8 million at June 30, 1997 to $66.1 million at June 30,
1998. Interest income on securities increased by $1 million, or 23.1%, to $6.0
million for nine months ended June 30, 1998 primarily due to a $21.1 million, or
44.8%, increase in the average balance of such securities. Interest income on
mortgage-related securities reflected a modest decrease of $107,000 primarily
due to a $3.6 million decrease in the average balances from $53.2 million at
June 30, 1997 to $49.6 million at June 30, 1998. .
INTEREST EXPENSE. Interest expense increased by $688,000, or 6.6%, from $10.5
million to $11.2 million for the nine months ended June 30, 1997 and June 30,
1998, respectively. The increase in interest expense was primarily the result of
a $17.5 million, or 71.2%, increase in the average balance of FHLB advances,
which increased from $24.6 million at June 30, 1997 to $42.3 million at June 30,
1998, and a slight increase in the weighted average rate paid on such borrowings
from 5.43% at June 30, 1997 to 5.45% at June 30, 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 $1.3
million, or 1.8%, decline in the average balance of savings accounts, combined
with a basis point reduction in the weighted average yield of such accounts.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses was $779,000 for
the nine months ended June 30, 1998, compared to $137,000 for the nine months
ended June 30, 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, in the
future, it may need to maintain an allowance for loan losses at a higher level
than it has maintained in previous periods.
NON-INTEREST INCOME. The Bank experienced a $78,000 increase in non-interest
income from $454,000 to $532,000 for the nine months ended June 30, 1997 and
June 30, 1998, respectively, due primarily to an increase in service charges and
fee income. Service charges and fee income increased $111,000, or 27.8%,
primarily due to an implementation of surcharges on ATM transactions in late
February 1997, as well as increased loan origination and deposit account
activity.
NON-INTEREST EXPENSE. Total non-interest expense increased from $6.8 million to
$12.2 million for the nine months ended June 30, 1997 and June 30, 1998,
respectively, due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation. A $499,000, or 13.1%, increase in
salary and benefit expense contributed to the increase. This increase was
primarily due to the establishment of an ESOP accrual, and staff additions
relating to the opening of a new branch office in January 1998.
INCOME TAXES. The Company had an income tax benefit of $736,000 for the nine
months ended June 30, 1998 compared to an expense of $861,000 for the nine
months ended June 30, 1997 resulting in effective income tax benefit and income
tax expense rates of (43.9%) and 31.3%, respectively. The decrease in income tax
expense and change in effective tax rate were
20
<PAGE> 23
attributable to a net operating loss relating to the one-time charitable
donation to the Foundation, combined with a state tax credit granted under the
Neighborhood Assistance Act.
ITEM 3. 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.
21
<PAGE> 24
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other information
Not applicable
Item 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*
22
<PAGE> 25
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 (submitted only with filing
in electronic format)
* Incorporated herein by reference into this document
from the Exhibits to Form S-1, Registration
Statement, and any amendments thereto, Registration
No. 333-43281.
(B) Reports on Form 8-K
On April 28, 1998 the Company filed an 8-K to
announce its earnings for the quarter ended March 31,
1998. The press release announcing the Company's
second quarter earnings was filed by exhibit.
23
<PAGE> 26
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: August 12 , 1998 By: /s/ E. Lee Beard
E. Lee Beard
President and Chief Executive
Officer
Date: August 12 , 1998 By: /s/ Patrick J. Owens, Jr.
Patrick J. Owens, Jr.
Chief Financial Officer and Treasurer
24
<PAGE> 27
EXHIBIT INDEX
11.0 Statement regarding Computation of Per Share Earnings 26
27.0 Financial Data Schedule (submitted only with filing in electronic
format) --
25
<PAGE> 1
EXHIBIT 11.0
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1997
----------- -------------
<S> <C> <C>
Net Income $ 991 --
=========== ===
Weighted average shares outstanding:
Weighted average shares outstanding 6,427,350 --
Less: Unallocated shares held by ESOP (514,188) --
Plus: ESOP shares released or
committed to be released during
the fiscal year 17,140 --
----------- ---
5,930,302 --
=========== ===
Earnings per share (1) $ 0.17 N/A
=========== ===
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1998 June 30, 1997
----------- -------------
<S> <C> <C>
Net Loss $ (942) --
=========== ===
Weighted average shares outstanding:
Weighted average shares outstanding 6,427,350 --
Less: Unallocated shares held by ESOP (514,188) --
ESOP shares released
or committed to be
released during the fiscal year 17,140 --
----------- ---
5,930,302 --
=========== ===
Earnings per share(1) $ (0.16) N/A
=========== ===
</TABLE>
- --------
(1) Earnings per share, basic and diluted, are the same for the three months
ended June 30, 1998 and the nine months ended June 30, 1998
26
<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>
<CIK> 0001050996
<NAME> NORTHEAST PENNSYLVANIA FINANCIAL CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,871
<INT-BEARING-DEPOSITS> 8,248
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 106,286
<INVESTMENTS-CARRYING> 67,166
<INVESTMENTS-MARKET> 67,504
<LOANS> 279,696
<ALLOWANCE> 2,022
<TOTAL-ASSETS> 477,807
<DEPOSITS> 322,872
<SHORT-TERM> 349
<LIABILITIES-OTHER> 4,125
<LONG-TERM> 65,503
0
0
<COMMON> 64
<OTHER-SE> 84,894
<TOTAL-LIABILITIES-AND-EQUITY> 477,807
<INTEREST-LOAN> 15,971
<INTEREST-INVEST> 3,694
<INTEREST-OTHER> 2,299
<INTEREST-TOTAL> 21,964
<INTEREST-DEPOSIT> 9,464
<INTEREST-EXPENSE> 11,190
<INTEREST-INCOME-NET> 10,774
<LOAN-LOSSES> (779)
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 12,205
<INCOME-PRETAX> (1,678)
<INCOME-PRE-EXTRAORDINARY> (1,678)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (942)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
<YIELD-ACTUAL> 7.46
<LOANS-NON> 954
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,272
<CHARGE-OFFS> (36)
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,022<F1>
<ALLOWANCE-DOMESTIC> 1,451
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 571<F2>
<FN>
<F1>ALLOWANCE FOR LOAN 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>
