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 June 30, 1999
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)
- -------------------------------------------------------------------------------
DELAWARE 06-1504091
- -------------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
entification No.)
- -------------------------------------------------------------------------------
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
- -------------------------------------------------- ----------------------------
(570) 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
5,800,683 shares of Common Stock outstanding as of August 12, 1999.
<PAGE>
TABLE OF CONTENTS
Item
No.
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
June 30, 1999 (unaudited) and September 30, 1998.............. 1
Consolidated Statements of Operations for the Three Months Ended
June 30, 1999 and 1998 (unaudited)............................ 2
Consolidated Statement of Comprehensive Income for the Three Months
Ended June 30, 1999 and 1998 (unaudited)....................... 3
Consolidated Statements of Operations for the Nine Months Ended
June 30, 1999 and 1998 (unaudited)............................. 4
Consolidated Statement of Comprehensive Income for the Nine Months
Ended June 30, 1999 and 1998 (unaudited)........................ 5
Consolidated Statements of Changes in Equity for the
Years Ended September 30, 1998 and 1997 and the Nine Months
Ended June 30, 1999 (unaudited)................................. 6
Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 1999 and 1998(unaudited)............................... 7
Notes to Consolidated Financial Statements (unaudited)......... 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk...... 27
Part II - OTHER INFORMATION
1 Legal Proceedings.............................................. 28
2 Changes in Securities and Use of Proceeds...................... 28
3 Defaults Upon Senior Securities................................ 28
4 Submission of Matters to a Vote of Security Holders............ 28
5 Other Information.............................................. 28
6 Exhibits and Reports on Form 8 - K............................. 28
Signatures
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Financial Condition
June 30, 1999 (unaudited) and September 30, 1998
(in thousands)
June 30, September 30,
1999 1998
Assets (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 8,128 $ 3,053
Securities available-for-sale 189,542 189,094
Securities held-to-maturity (estimated fair value of $28,820 at
June 1999 and $32,072 in September 1998) 28,330 31,770
Loans (less allowance for loan losses of $2,520 for June1999 and
$2,273 for September 1998) 341,376 282,706
Accrued interest receivable 4,465 3,998
Assets acquired through foreclosure 75 112
Property and equipment, net 9,655 8,648
Other assets 7,616 2,887
----- -----
Total assets $ 589,187 $ 522,268
========= =========
Liabilities and Equity
Deposits $ 364,480 $ 324,005
Federal Home Loan Bank advances 142,984 106,498
Other borrowings 305 825
Advances from borrowers for taxes and insurance 1,515 717
Accrued interest payable 1,134 1,028
Other liabilities 2,737 1,761
----- -----
Total liabilities $ 513,155 $ 434,834
--------- ---------
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 64
Additional paid-in capital 62,110 62,083
Common stock acquired by stock benefit plans (7,272) (4,799)
Retained earnings - substantially restricted 30,194 27,208
Accumulated other comprehensive income (loss) (1,479) 2,878
Treasury stock, at cost (626,667 shares) (7,585) -
------- -
Total equity $ 76,032 $87,434
-------- -------
Total liabilities and equity $589,187 $ 522,268
======== =========
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended June 30, 1999 and 1998 (unaudited)
(in thousands)
For the Three months ended
June 30,
Interest Income: 1999 1998
---- ----
(unaudited)
<S> <C> <C>
Loans $ 6,291 $ 5,445
Mortgage-related securities 897 899
Investment securities:
Taxable 1,518 1,224
Non-taxable 848 367
--- ---
Total interest income 9,554 7,935
Interest Expense:
Deposits 3,320 3,149
Federal Home Loan Bank advances and other 1,666 619
----- ---
Total interest expense 4,986 3,768
Net interest income 4,568 4,167
Provision for loan losses 149 292
--- ---
Net interest income after provision for loan losses 4,419 3,875
Non-interest Income:
Service charges and other fees 223 180
Other income 123 67
Insurance premium income 61 -
Gain (loss) on sale of:
Real estate owned (8) (38)
Loans 246 14
Available-for-sale securities 31 -
Other (5) -
--- -
Total non-interest income 671 223
Non-interest Expense:
Salaries and net employee benefits 1,898 1,622
Occupancy costs 426 390
Data processing 129 72
Professional fees 159 94
Federal Home Loan Bank service charges 133 108
Charitable contributions 38 25
Other 597 422
--- ---
Total non-interest expense 3,380 2,733
Income before income taxes 1,710 1,365
Income taxes 330 374
--- ---
Net income $ 1,380 $ 991
======= =======
Earnings per share - basic $ 0.27 $0.17
====== =====
Earnings per share - diluted $ 0.25 $0.17
====== =====
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Comprehensive Income
For the Three Months Ended June 30, 1999 and 1998 (unaudited)
(in thousands, except per share data)
For the Three Months Ended
June 30,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net Income $ 1,380 $ 991
======= =====
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ (3,263) $ (8)
Less: Reclassification adjustment for gains included in
net income 20 -
---- ---- -
Other comprehensive loss $ (3,243) $ (8)
Comprehensive income (loss) $ (1,863) $ 983
========= =======
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Nine Months Ended June 30, 1999 and 1998 (unaudited)
(in thousands, except per share data)
For the Nine Months Ended
June 30,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Interest
Income:
Loans $17,839 $15,971
Mortgage-related securities 3,194 2,299
Investment securities:
Taxable 4,156 2,993
Non-Taxable 2,308 701
----- ---
Total interest income 27,497 21,964
Interest Expense:
Deposits 9,931 9,464
Federal Home Loan Bank advances and other 4,336 1,726
----- -----
Total interest expense 14,267 11,190
Net interest income 13,230 10,774
Provision for loan losses 343 779
--- ---
Net interest income after provision for loan losses 12,887 9,995
Non-interest Income:
Service charges and other fees 635 488
Other Income 305 112
Insurance premium income 184 -
Gain (loss) on the sale of:
Real estate owned (39) (72)
Loans 282 17
Available-for-sale securities 64 9
Other (6) 2
--- -
Total non-interest income 1,425 556
Non-interest Expense:
Salaries and net employee benefits 5,461 4,306
Occupancy costs 1,246 1,149
Data processing 371 208
Professional fees 624 214
Federal Home Loan Bank and other service charges 324 286
Charitable contributions 83 4,924
Other 1,637 1,142
----- -----
Total non-interest expense 9,746 12,229
Income (loss) before income taxes 4,566 (1,678)
Income taxes 973 (736)
--- -----
Net income (loss) $3,593 $(942)
====== ======
Earnings per share - basic $ 0.65 $(0.16)
====== =======
Earnings per share - diluted $ 0.62 $(0.16)
====== =======
</TABLE>
Page 4
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Comprehensive Income
For the Nine Months Ended June 30, 1999 and 1998 (unaudited)
(in thousands, except per share data)
For the Nine Months Ended
June 30,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net Income (loss) $ 3,593 $ (942)
======= =======
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $(4,399) $ 487
Less: Reclassification adjustment for gains included in
net income 42 6
------- ----------
Other comprehensive income (loss) $ (4,357) $ 481
Comprehensive loss $ (764) $ (461)
======= =======
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 1998 and 1997, and
the Nine Months Ended June 30, 1999 (unaudited)
Common Stock Accumulated
Additional Acquired by other
Common Paid-in stock benefit Retained comprehensive Treasury Total
Stock Capital plans Earnings income (loss) Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1996 $ - $ - $ - $ 25,874 $253 $ 26,127
Net changes in gains (losses) on
securities available-for-sale, 1,030 1,030
net of tax
Net income 1,381 1,381
---- ---- ---- ------ ------- -------
Balance September 30, 1997 $ - $ - $ - $ 27,255 $ 1,283 $28,538
Issuance of Common Stock ($.01
par value; 16,000,000
authorized shares; 6,427,350 64 64
shares issued)
Additional paid-in Capital 61,959 61,959
Unearned employee stock ownership
plan (ESOP) shares (5,142) (5,142)
ESOP shares committed to be 124 343 467
released
Net changes in gains (losses) on 1,595 1,595
securities available-for-sale,
net of tax
Net loss (47) (47)
---- ---- ---- ------ ------ ---------
Balance September 30, 1998 $ 64 $ 62,083 $ (4,799) $ 27,208 $ 2,878 $ 87,434
Unearned stock awards (3,312) (3,312)
ESOP shares committed to be 27 428 455
released
Stock awards committed to be 411 411
released
Net changes in gains (losses) on
securities available-for-sale, (4,357) (4,357)
net of tax
Treasury stock at cost, (7,585) (7,585)
626,667 shares
Cash dividend paid (607) (607)
Net income 3,593 3,593
---- ---- ---- ------ -------- ------- --------
Balance June 30, 1999 $ 64 $ 62,110 $ (7,272) $ 30,194 $ (1,479) $ (7,585) $ 76,032
==== ======== ========= ======== ========= ========= ========
</TABLE>
Page 6
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 1999 and 1998 (unaudited)
(in thousands)
For the Nine Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Operating Activities: (unaudited)
Net Income (loss) $ 3,593 ($ 942)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (Recovery) for REO loss 12 (68)
Provision for loan losses 343 779
Depreciation 626 451
Deferred income tax (benefit) provision 142 (1,888)
Funding of First Federal Charitable Foundation - 4,761
ESOP expense 455 -
Stock award expense 411 -
Amortization and accretion on:
Held-to-maturity securities 32 45
Available-for-sale securities 302 130
Amortization of deferred loan fees (597) (232)
(Gain) loss on sale of:
Assets acquired through foreclosure 39 72
Loans (282) (17)
Available-for-sale securities (64) (9)
Gain (loss) on disposal of property and equipment 6 (2)
Changes in assets and liabilities:
Increase in accrued interest receivable (467) (905)
Increase in other assets (2,137) (339)
Increase (decrease) in accrued interest payable 106 (25)
Increase (decrease) in accrued income taxes payable (566) 751
Increase in other liabilities 1,542 87
----- --
Net cash provided by operating activities 3,496 2,649
Investing Activities:
Net increase in loans (66,023) (23,657)
Proceeds from sale of:
Available-for-sale securities 19,401 -
Assets acquired through foreclosure 147 256
Loans 7,728 4,814
Proceeds from repayments of held-to-maturity securities 17,593 17,535
Proceeds from repayments of available-for-sale securities 48,984 22,070
Proceeds from disposal of fixed assets 71 2
Purchase of:
Held-to-maturity securities (14,545) (45,821)
Available-for-sale securities (72,562) (81,834)
Office properties and equipment (1,710) (1,780)
Federal Home Loan Bank stock (3,600) (1,222)
------- -------
Net cash used in investing activities (64,156) (109,637)
Financing Activities:
Net increase in deposit accounts 40,475 8,749
Net decrease in Federal Home Loan Bank short-term advances (8,500) (8,000)
Borrowings of Federal Home Loan Bank long-term advances 45,000 50,000
Repayments of Federal Home Loan Bank long-term advances (14) (13)
Net increase in advances from borrowers for taxes and insurance 798 780
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 1999 and 1998 (unaudited)
(in thousands)
For the Nine Months
Ended June 30,
1999 1998
(unaudited)
<S> <C> <C>
Net increase (decrease) in other borrowings $ (520) $ 257
Net proceeds from issuance of common stock - 52,120
Purchase of common stock for stock incentive plan (3,312) -
Purchase of treasury stock (7,585) -
Cash dividend on common stock (607) -
----- -
Net cash provided by financing activities 65,735 103,893
Increase (decrease) in cash and cash equivalents 5,075 (3,095)
Cash and cash equivalents, beginning of year 3,053 13,214
----- ------
Cash and cash equivalents, end of year 8,128 10,119
===== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 14,160 11,215
====== ======
Income taxes 1,391 400
===== ===
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax (4,357) 481
======= ===
Supplemental disclosure - non-cash information:
Transfer from loans to real estate owned 161 86
=== ==
</TABLE>
Page 8
<PAGE>
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 Company's Annual Report for the period ended September 30, 1998.
The results for the nine months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended
September 30, 1999.
Business
Northeast Pennsylvania Financial Corp. (the "Company") is the holding
company for First Federal Bank. The Company's principal subsidiary,
First Federal Bank, serves Northeast and Central Pennsylvania through
eleven full service office locations and two loan production offices.
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 First Federal Bank, Abstractors, Inc., and FIDACO, Inc.
First Federal Bank and Abstractors, Inc., a title insurance agency, are
wholly-owned subsidiaries of Northeast Pennsylvania Financial Corp.
FIDACO, Inc. is an inactive subsidiary of First Federal Bank and its
only major asset is an investment 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 (EPS), basic and diluted, were $0.27 and $0.25,
respectively, for the three months ended June 30, 1999 compared to
$0.17 for the three months ended June 30, 1998, and $0.65 and $0.62,
respectively, for the nine months ended June 30, 1999, compared to
($0.16) for the nine months ended June 30, 1998.
Page 9
<PAGE>
<TABLE>
<CAPTION>
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net Income $1,380 $991 $3,593 $(942)
====== ==== ====== ======
Basic:
Weighted average shares issues 6,427,350 6,427,350 6,427,350 6,427,350
Less: Unallocated/unearned shares held by stock
benefit plans (771,282) (514,188) (713,836) (514,188)
Less: Weighted Treasury shares (532,729) - (230,795) -
Plus: ESOP shares released
or committed to be released 66,418 6,428 57,132 6,428
-------- --------- --------- ---------
5,189,757 5,919,590 5,539,851 5,919,590
========= ========= ========= ==========
Earnings per share - basic $0.27 $0.17 $0.65 $(0.16)
===== ===== ===== =======
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
(Dollars in thousands, except per share data)
Diluted:
Net Income $1,380 $991 $3,593 $(942)
====== ==== ====== ======
Basic weighted shares outstanding 5,189,757 5,919,590 5,539,851 5,919,590
Dilutive Instruments:
Dilutive effect of stock awards 242,438 - 243,089 -
------- - ------- -
5,432,195 5,919,590 5,782,940 5,919,590
========= ========= ========= ==========
Earnings per share - diluted $0.25 $0.17 $0.62 $(0.16)
===== ===== ===== =======
</TABLE>
2. Recent Accounting Pronouncements
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
fiscal years beginning after December 15, 1997. Management has not yet
determined the impact, if any, of this statement on the Company. This
statement requires changes in disclosures and would not affect the
financial condition or operating results of 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
Page 10
<PAGE>
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 will 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 (as amended by SFAS 137 in June 1999) 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. SFAS 133 as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Earlier adoption is
permitted. The Company adopted SFAS 133 in its fiscal fourth quarter of
1998, including its provision for the reclassification of investments,
resulting in a $56.2 million transfer of securities from
held-to-maturity to available-for-sale.
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"), a charitable foundation
dedicated to the communities served by the Bank. The common stock
contributed by the Company to the Foundation at a value of $4.8 million
was charged to expense. 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.
Page 11
<PAGE>
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 amount of the liquidation account decreases to the extent
the balances of eligible deposits decrease. The liquidation account
approximated $15.3 million at September 30, 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, 1999, there were no shares of
preferred stock issued.
Page 12
<PAGE>
<TABLE>
<CAPTION>
4. Loans
Loans are summarized as follows: June 30, September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
Real Estate loans:
One-to four-family $189,595 $ 176,924
Multiple family and commercial 28,425 11,938
Construction 3,290 3,759
----- -----
Total real estate loans 221,310 192,621
------- -------
Consumer Loans:
Home equity loans and lines of credit 65,602 52,244
Automobile 31,540 24,589
Education 2,555 2,351
Unsecured lines of credit 1,710 1,589
Other 5,349 3,423
----- -----
Total consumer loans 106,756 84,196
------- ------
Commercial loans 17,189 9,742
------ -----
Total loans 345,255 286,559
------- -------
Less:
Allowance for loan losses (2,520) (2,273)
Deferred loan origination fees (1,359) (1,580)
---------- ---------
Total loans, net $ 341,376 $282,706
========= ========
</TABLE>
<TABLE>
<CAPTION>
Allowance for loan losses is summarized as follows:
For the nine For the nine
months ended For the year ended months ended
June 30, 1999 September 30, 1998 June 30, 1998
------------- ------------------ -------------
<S> <C> <C> <C>
Balance, beginning of period $ 2,273 $ 1,272 $ 1,272
Charge-offs (99) (76) (36)
Recoveries 3 18 7
Provision for loan losses 343 1,059 779
--- ----- ---
Balance, end of period $ 2,520 $ 2,273 $ 2,022
======= ======= =======
</TABLE>
5. Deposits
<TABLE>
<CAPTION>
Deposits consist of the following major classifications (in thousands):
June 30, 1999 September 30, 1998
------------- ------------------
Percent Percent
Amount of Total Amount of Total
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) $71,380 19.6% $ 69,956 21.6%
Money market accounts 20,723 5.7% 16,368 5.0%
Certificates of deposit less than $100,000 183,776 50.4% 159,918 49.4%
Certificates of deposit greater than $100,000(1) 42,014 11.5% 36,150 11.2%
NOW Accounts 32,445 8.9% 31,182 9.6%
Non-interest bearing deposits 14,142 3.9% 10,431 3.2%
------ ---- ------ ----
Total deposits at end of period $ 364,480 100.00% $324,005 100.0%
========= ======= ======== ======
<FN>
(1) Deposit balances in excess of $100,000 are not federally insured.
</FN>
</TABLE>
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<PAGE>
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, avoidance of any adverse effect as a result of the Year 2000 issue,
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, 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, professional fees, 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.
The Bank acquired the assets and liabilities of the Danville branch of Omega
Bank in June 1999. This increases the Bank's total number of branches to eleven,
while adding the first branch in Montour County.
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
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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 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 the Bank hired two experienced commercial lenders to provide additional
coverage in market areas where we have determined an opportunity exists. In
addition to the two commercial lenders, the Bank has hired a loan production
officer in Berks county. During the quarter the Bank completed a series of
transactions, which sold fixed rate long term mortgages and investments and
purchased adjustable rate mortgages and higher yielding investments. The result
of these transactions was to increase income for the current quarter and have a
positive impact on net interest margin while reducing interest rate risk in this
transaction.
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 the Bank's asset/liability policies and interest rate risk position.
The ALCO meets on a quarterly basis and reports trends and interest rate risk
position to the Finance Committee of the Board of Directors. It then 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 25% of the total originations in a given year; (iii)
selling, in the secondary market, fixed-rate mortgage loans with terms greater
than 15 years, while retaining the servicing rights, and; (iv) 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.
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
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<PAGE>
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. 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 estimates
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 vary from
the Bank's model due to differences in assumptions utilized. The following table
sets forth the Bank's internal NPV as of June 30, 1999.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Value of Assets
Interest Rates
In Basis Points
(Rate Shock)
Net PortfolioValue
--------------------------------------------------------- -------------------------------------
NPV
Amount $ Change % Change Ratio Change (1)
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 40,680 (24,390) (37.48%) 7.77% (355)
200 49,612 (15,458) (23.76%) 9.18% (215)
100 57,877 (7,193) (11.05%) 10.37% (95)
Static 65,070 0 0.00% 11.32% 0
-100 67,456 2,386 3.67% 11.48% 16
-200 63,985 (1,085) (1.67%) 10.75% (57)
-300 59,221 (5,849) (8.99%) 9.83% (149)
- ------------------------------------------
<FN>
(1) Expressed in basis points
</FN>
</TABLE>
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.
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<PAGE>
E. 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. 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-bearing 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. At June 30, 1999, the Bank's cumulative one year gap was a negative
13.2% of total assets compared to a negative 7.8% at September 30, 1998.
September's interest rate sensitivity gap reflects the impact of the Bank
prefunding investments which it had determined had a high likelihood of being
called in the first fiscal quarter of 1999. These investments were funded with
short term FHLB advances which were repaid in subsequent quarter with proceeds
of called securities.
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, generally 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.
F. Non-Performing Assets
<TABLE>
<CAPTION>
The following table presents information regarding the Bank's non-performing
assets at the dates indicated:
June 30, September 30,
1999 1998
<S> <C> <C>
Non-performing loans:
Non-accrual loans $ 1,053 $ 1,239
Real estate owned and other repossessed assets 75 112
-- ---
Total non-performing assets $ 1,128 $ 1,351
======= =======
Total non-performing loans as a percentage of total loans 0.31% 0.44%
Total non-performing assets as a percentage of total assets 0.19% 0.26%
</TABLE>
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<PAGE>
G. Liquidity and Capital Resources
The Bank's primary sources of funds 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, 1999 and 1998,
the Bank's liquidity ratios were 12.4% and 14.6%, respectively.
At June 30, 1999, the Bank exceeded all of its regulatory capital requirements
with a tangible capital level of $56.8 million, or 10.0% of total adjusted
assets, which is above the required level of $8.6 million, or 1.5%; a core
capital level of $56.8 million, or 10.0% of total adjusted assets, which is
above the required level of $17.0 million, or 3.0%; and a risk-based capital of
$60.6 million, or 21.2% of risk-weighted assets, which is above the required
level of $22.9 million, or 8.0%.
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, 1999, cash and cash equivalents
and investment and mortgage-related securities available-for-sale totaled $197.7
million, or 33.5% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At June 30, 1999, the Bank had $142.0 million in
advances outstanding from the FHLB, and had an additional overall borrowing
capacity from the FHLB of $260.3 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 June 30, 1999, the Bank had commitments to originate and purchase loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $42.3 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, 1999, totaled $176.7 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. At June 30, 1999, the Bank had $32.2 million in jumbo certificates.
In June 1999, the Bank acquired the assets and liabilities of the Danville
branch of Omega Bank. This is the eleventh branch office for First Federal Bank
and the first one in Montour County. During June the Bank also received the
approval to open an additional office in the Shavertown area of Back Mountain
and a supermarket branch in Freeland. Both of these branches are expected to
open in the fourth quarter of fiscal 1999. The Bank has also hired a loan
production officer operating in Berks County. It is expected that this LPO will
enhance the Bank's mortgage lending capabilities. In June 1999, the Company
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<PAGE>
received approval from the Pennsylvania Department of Banking to form a trust
company, Northeast Pennsylvania Trust Co. (the "Trust"). The Trust is expected
to begin operations in the fourth fiscal quarter of 1999. The Trust will serve
current customers and potentially other financial institutions' customers, with
trust, estate and asset management services and products. Management is
currently evaluating further expansion.
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. At June 30, 1999, the
Bank had total equity, determined in accordance with generally accepted
accounting principles, of $57.3 million, or 10.0%, of total assets, which
approximated the Bank's regulatory tangible capital at that date of 10.0% 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 Disclosure
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Company of the Year 2000 issue could
materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
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. Year 2000 issues result from the inability of many computer
programs or computerized equipment to accurately calculate, store or use a date
after December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operation including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information.
The Bank is subject to the regulation and oversight of various banking
regulators, which requires complying with specific timetables, programs and
guidance regarding Year 2000 issues. Regulatory examination of the Bank's Year
2000 programs are conducted on a periodic basis and reports are submitted by the
Bank to the banking regulators on a periodic basis. In addition, reports are
currently provided on a monthly basis to the Board of Directors.
Company State of Readiness. The Company has completed an assessment of its
financial and operational software systems in accordance with the various
regulatory agency guidance documents. The Company maintains an inventory of
hardware and software systems, which ranges from mission critical software
systems and personal computers to security and video equipment backup
generators, and general office equipment. The Company has prioritized its
hardware and software systems to focus on the most critical systems first.
For most of its mission critical software systems, the Company relies on a major
data processing provider in the banking industry. The Company has received
written representations and warranties from that vendor that the system is Year
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<PAGE>
2000 compliant. The Company has successfully completed testing its mission
critical systems. The Company is also upgrading personal computers to meet both
system and Year 2000 requirements. In connection with the Company's assessment,
a number of the less significant third party vendors advised the Company that
their software is Year 2000 compliant, and the Company has fully tested that
software.
The Company has communicated with all of its significant vendors, suppliers and
large commercial customers to determine the extent to which the Company is
vulnerable to those third-parties' failure to remedy their own Year 2000
problems. In the event that any of them do not successfully achieve Year 2000
compliance in a timely manner, the Company's business or operations could be
adversely affected. If significant suppliers fail to meet Year 2000 operating
requirements, the Company intends to engage alternative suppliers. For
insignificant vendors, the Company will not necessarily validate that they are
Year 2000 compliant. No insignificant vendor has responded that they will not be
compliant by March 1999. The Bank has surveyed its large commercial customers as
to their Y2K preparedness. Respondents have acknowledged their awareness of Y2K
issues and currently believe that these issues will not materially affect their
financial condition, liquidity, or results of operations. The extent to which
customers are Y2K compliant is considered in the Bank's decision to extend
credit.
Contingency Plan. The Company is in the process of obtaining back-up service
providers and assessing the potential adverse risks to the Company. The
Company's contingency plans involve the use of manual labor to compensate for
the loss of certain automated computer systems and inconveniences caused by
disruption in command systems.
The contingency plan focuses on mission critical functions, third party
relationships, environmental system, proprietary programs, and non-computer
related systems. The contingency plan has identified completion dates, test
dates and trigger dates. The contingency plan is primarily based upon manual
back up systems and as such includes all necessary forms and procedures in order
to be certain that all required information can be appropriately recorded. In
addition, this plan includes adequate staffing on site during the Year 2000 date
change weekend, to be certain that the Year 2000 changes have been adequately
addressed. In addition, in the event of any other unforeseen problems the
Company would follow its current computer business continuation plans until such
problems are corrected.
Cost of Year 2000. Over the past several years, the Company's Technology Plan
has called for an aggressive schedule for installing new systems or upgrading
old systems in order to build a technology infrastructure which will allow the
Company to offer competitive products and improve customer services while
providing for internal efficiencies. The technology improvements as part of the
Technology Plan have allowed the Company to avoid specific costly Year 2000
issues. The Company estimates its expenditures specifically associated with Year
2000 will be $75,000 during the fiscal year ending September 1999 and $50,000
during the fiscal year ending September 2000.
The Company believes that the costs or the consequences of incomplete or
untimely resolution of its Year 2000 issues do not represent a known material
event or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition. However,
if compliance is not achieved in a timely manner by the Company or any of its
significant related third-parties, the Y2K issue could have a material effect on
the Company's operations and financial position.
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<PAGE>
The cost of the projects and the date on which the Company plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which are derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Risks of Year 2000. The Year 2000 issue presents potential risks of uncertain
magnitude. The risks arise both with regard to systems purchased by the Company
through third party vendors as well as those outside the control of the Company,
such as with ATM networks or credit card processors. These failures may cause
delays in the ability of customers to access their funds through automated
teller machines, point of sale terminals at retail locations, or other shared
networks. The Year 2000 issue also poses the potential risk for business
disruption due to a mission critical software system failure, which could result
in inaccurate interest payment calculations, credit transactions, or
record-keeping. The Company and the OTS are closely monitoring the progress of
the Company's major third party vendors and, to date, the Company is satisfied
with their progress. However, if the Company, its customers, or vendors are
unable to resolve Year 2000 issues in a timely manner, it could result in a
material financial risk.
I. Comparison of Financial Condition at June 30, 1999 and September 30, 1998
Total assets increased $66.9 million from $522.2 million at September 30, 1998
to $589.2 million at June 30, 1999. The growth in assets was primarily due to
increases in loans receivable, cash, and other assets, which were offset by a
decrease in investment securities.
Cash and cash equivalents increased $5.1 million to $8.1 million at June 30,
1999, from $3.0 million at September 30, 1998, primarily due to an increase in
FHLB advances and deposits, offset by the purchase of approximately $45.0
million in loans, increased loan originations, purchase of the Company's common
stock and additional shares for the employee stock award program.
Securities classified as held-to-maturity decreased $3.4 million, or 10.8%, to
$28.3 million at June 30, 1999, while available-for-sale securities increased
$448,000, from $189.1 million at September 30, 1998 to $189.5 million at June
30, 1999. These changes were primarily attributable to the effect of called and
sold securities, net of security purchases, combined with an adjustment for
unrealized gain/loss on available-for-sale securities.
Loans increased $58.7 million to $341.4 million at June 30, 1999. This was
primarily due to a $16.5 million increase in multiple family and commercial real
estate loans due to marketing efforts and competitive pricing of such products.
Home equity loans and lines of credit increased $13.4 million as a result of a
$10.0 million purchase of loans from another financial institution, combined
with increased originations due to marketing efforts and competitive pricing of
such loans. Mortgage loans increased $12.7 million due to the acquisition of
$5.6 million in loans from the branch purchase of Omega Bank, combined with the
net effect of loans purchased from other financial institutions and loans sold
to government agencies. Other consumer loans increased $9.2 million due to the
purchase of $4.0 million in various consumer loans from the branch purchase of
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Omega Bank, combined with increased indirect auto loan originations. Commercial
loans increased $7.4 million due to competitive pricing of such products,
combined with the acquisition of $2.4 million in commercial loans from the
branch purchase of Omega Bank.
Prepaid expenses and other assets increased $4.7 million to $7.6 million at June
30, 1999. This change was primarily due to a $2.6 million increase in the
deferred income tax benefit resulting from a decline in unrealized gain/loss on
available-for-sale securities, combined with a $1.5 million increase in
intangible assets resulting from goodwill relating to the purchase of the new
branch office. The goodwill and core deposit premium will be amortized over a
period of six to ten years.
Total deposits increased $40.5 million, or 12.5%, to $364.5 million at June 30,
1999. This increase in deposits was primarily due to a $29.7 million increase in
certificates of deposit from $196.1 million at September 30, 1998 to $225.8
million at June 30, 1999, as a result of increased marketing efforts and
competitive pricing of such products, combined with the assumption of $11.3
million in various certificate of deposit accounts from the branch purchase of
Omega Bank. Also contributing to this change was an increase of $9.4 million in
checking accounts due to increases in money market accounts of $4.3 million and
non-interest bearing demand accounts of $3.8 million, resulting from a more
active solicitation of such accounts, combined with the acquisition of $2.6
million in various checking accounts from the branch purchase of Omega Bank.
Savings accounts increased $1.4 million due to accounts acquired in the branch
purchase of Omega Bank.
FHLB advances increased $36.5 million from $106.5 million at September 30, 1998
to $143.0 million at June 30, 1999. This was a result of management's
determination to place increased emphasis on the utilization of FHLB borrowings
to fund asset growth. FHLB borrowings have been invested at yields higher than
the cost of the borrowed funds thereby increasing net interest income.
Total equity decreased $11.4 million to $76.0 million at June 30, 1999. This
decrease in equity resulted primarily from the repurchase of the Company's
common stock, at a cost of $7.6 million, along with a $4.3 million decrease in
unrealized gain (loss) on securities. Contributing to this decline was a $3.3
million acquisition of stock for stock benefit plans. These decreases were
offset by operating results for the period resulting in a net increase of $3.0
million in retained earnings.
J. Comparison of Operating Results for the Three Months ended June 30, 1999
and June 30, 1998
General. The Company had net income of $1.4 million for the three months ended
June 30, 1999, compared to net income of $991,000 for the three months ended
June 30, 1998, an increase of $389,000 or 39.3%. This increase was primarily
attributable to a $1.6 million rise in interest income, as well as a $448,000
increase in non-interest income, offset by increases in interest expense and
non-interest expense of $1.2 million and $647,000, respectively.
Interest Income. Total interest income increased $1.6 million, or 20.4%, from
$7.9 million for the three months ended June 30, 1998 to $9.5 million for the
three months ended June 30, 1999. This was primarily due to a $104.4 million, or
23.8%, increase in the average balance of interest earning assets, offset by a
slight decrease in the weighted average yield on interest earning assets.
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<PAGE>
Specifically, interest income on loans increased $846,000 from $5.4 million for
the period ending June 30, 1998 to $6.3 million. This was primarily due to a
$571,000 increase in interest income on consumer loans due to a $31.6 million
increase in the average balance of these loans. Interest income on commercial
loans increased $263,000 due to a $4.9 million increase in the average balance
of these loans. Interest income on securities increased $773,000 to $3.3 million
for the three months ended June 30, 1999 primarily due to a $69.3 million
increase in average balances of investment securities.
Interest Expense. Interest expense increased $1.2 million, or 32.3%, from $3.8
million to $5.0 million for the three months ended June 30, 1998 and June 30,
1999, respectively. The increase in interest expense was primarily the result of
an $82.4 million increase in the average balance of FHLB advances and other
borrowings, which increased from $46.2 million at June 30, 1998 to $128.5
million at June 30, 1999. The increase in FHLB advances reflects management's
decision to more heavily utilize FHLB advances to fund asset growth.
Contributing to this change was a $169,000 increase in interest expense on
certificates of deposit, which was the result of a $24.8 million increase in the
average balance of these accounts.
Provision for Loan Losses. The Bank's provision for loan losses for the three
months ended June 30, 1999 was $149,000 compared to $292,000 for the three
months ended June 30, 1998. The provision for loan losses increases the
allowance for loan losses which is maintained at a level that management
considers adequate to provide for estimated losses based upon an evaluation of
known and inherent risks in the loan portfolio. Loan losses, other than those
incurred on loans held for sale, are charged directly against the allowance and
recoveries on previously charged-off loans are added to the allowance.
Management's evaluation is based upon, among other things, delinquency trends,
the volume of non-performing loans, prior loss experience of the portfolio,
current economic conditions, and other relevant factors. Although management
believes it has used the best information available to it in making such
determinations, and that the allowance for loan losses is adequate, future
adjustments to the allowance may be necessary, and net income may be adversely
affected if circumstances differ substantially from the assumptions used in
determining the level of the allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for losses on loans. Such agencies may require the
Company to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
Non-interest Income. Non-interest income increased $448,000 from $223,000 to
$671,000, for the three months ended June 30, 1999. The increase in non-interest
income was primarily due to an increase in gain on sale of loans from $14,000 to
$246,000 for the three months ended June 30, 1999, primarily due to increased
sales of mortgage loans in the current period. Insurance premium income
increased $61,000 as a result of closings performed by the Company's title
insurance subsidiary. Other income increased $56,000 due to increases in rental
income, commission earned on consumer loan insurance, and cash surrender value
of Directors' and Officers' life insurance policies. Contributing to these
increases was a $43,000 increase in service charges and other fees resulting
from increased customer activity on the various deposit and loan accounts.
Non-interest Expense. Total non-interest expense increased from $2.7 million for
the three months ended June 30, 1998 to $3.4 million for the three months ended
June 30, 1999. This increase was due primarily to an increase in compensation
and employee benefits of $276,000, or 17.0%, for the three months ended June 30,
1999 primarily due to amortization of goodwill associated with branch and
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<PAGE>
subsidiary acquisitions, the expenses associated with branch expansion,
establishment of the employee stock award program, and an adjustment to the
employee 401(K) plan. Other non-interest expense increased $175,000, or 41.5%,
primarily due to amortization of goodwill associated with branch and subsidiary
acquisitions, increased marketing efforts of deposit products, employee
recruitment expense, supply expense, an increase in the provision for loss on
REO, and additional tax expense associated with the corporation formed March 31,
1998. Professional fees increased $65,000, or 69.1%, due to increased legal and
accounting fees associated with being a public company. Data processing expenses
increased $57,000 or 79.2% due to increased depreciation expense relating to new
teller and mainframe hardware and software.
Income Taxes. The Company had an income tax provision of $330,000 for the three
months ended June 30, 1999, compared to a provision of $374,000 for the three
months ended June 30, 1998 resulting in effective tax rates of 19.3%, and 27.4%,
respectively. The change in income tax expense was attributable to increased
tax-free security purchases, offset by the increase in income before taxes.
K. Comparison of Operating Results for the Nine Months ended June 30, 1999
and June 30, 1998.
General. For the nine months ended June 30, 1999, the Company reported net
income of $3.4 million, compared to a $942,000 net loss for the same period in
1998. The loss at June 30, 1998 relates 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 (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 $5.5 million, or 25.2%, from
$22.0 million to $27.5 million for the nine months ended June 30, 1998 and June
30, 1999, respectively, primarily due to a $123.2 million, or 30.8%, increase in
the average balance of interest earning assets, offset by a slight decrease in
the weighted average yield on interest earning assets. This increase was
primarily due to a $3.7 million, or 61.2%, increase in interest income on
securities, to $9.7 million for the nine months ended June 30, 1999, primarily
due to a $99.1 million increase in the average balance of such securities.
Interest income on loans also increased $1.9 million, or 11.7%, to $16.0 million
for the nine months ended June 30, 1999, primarily due to the increase in
interest income on consumer loans of $1.5 million, or 35.7%, to $5.7 million at
June 30, 1999, due to a $25.7 million increase in the average balance of
consumer loans from $66.0 million at June 30, 1998 to $91.7 million at June 30,
1999. This increase is a result of the purchase of home equity loans from
another financial institution, increased marketing effort and competitive
pricing of these loans. Interest income on commercial loans increased $540,000,
or 47.9%, from $1.1 million at June 30, 1998 to $1.6 million at June 30, 1999.
Interest Expense. Interest expense increased $3.1 million, or 27.5%, from $11.2
million to $14.3 million for the nine months ended June 30, 1998 and June 30,
1999, respectively. The increase in interest expense was primarily the result of
a $69.0 million increase in the average balance of FHLB advances, which
increased from $42.3 million at June 30, 1998 to $111.4 million at June 30,
1999, offset by a slight decrease in the weighted average rate paid on such
borrowings from 5.45% at June 30, 1998 to 5.20% at June 30, 1999. The increase
Page 24
<PAGE>
in FHLB advances reflects management's decision to more heavily utilize FHLB
advances to fund asset growth. This increase in interest expense was also due to
an overall increase in interest expense on deposits primarily due to a $19.8
million, or 10.5%, rise in the average balance of certificate accounts.
Provision for Loan Losses. The Bank's provision for loan losses was $343,000 for
the nine months ended June 30, 1999, compared to $779,000 for the nine months
ended June 30, 1998. The allowance is increased by the provision for loan losses
which is charged to operations. Loan losses, other than those incurred on loans
held for sale, are charged directly against the allowance and recoveries on
previously charged-off loans are added to the allowance. The allowance for loan
losses is maintained at a level that management considers adequate to provide
for estimated losses based upon an evaluation of known and inherent risks in the
loan portfolio. Management's evaluation is based upon, among other things,
delinquency trends, the volume of non-performing loans, prior loss experience of
the portfolio, current economic conditions, and other relevant factors. Although
management believes it has used the best information available to it in making
such determinations, and that the allowance for loan losses is adequate, future
adjustments to the allowance may be necessary, and net income may be adversely
affected if circumstances differ substantially from the assumptions used in
determining the level of the allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for losses on loans. Such agencies may require the
Company to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
Non-interest income. The Company experienced an $869,000 increase in
non-interest income from $556,000 to $1.4 million for the nine months ended June
30, 1998 and June 30, 1999, respectively, due to the largest factor being a
$265,000 increase in gain on sale of loans due to sales of mortgage loans to
various government agencies. Other income increased $193,000 primarily due to
increased rental income and an increase in the cash surrender value of Officers
and Directors life insurance policies. Also contributing to this increase was a
$184,000 increase in insurance premium income from closings performed by the
Company's title insurance subsidiary. Service charges and fee income also
increased $147,000 primarily due to increased customer activity on various
deposit and loan accounts.
Non-interest expense. Total non-interest expense decreased from $12.2 million to
$9.7 million for the nine months ended June 30, 1998 and June 30, 1999,
respectively, due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation in March 1998. This decrease was
offset by an increase in salary and benefit expense of $1.2 million, or 26.8%,
primarily due to the expense associated with branch expansion, establishment of
the ESOP and stock award programs, and an adjustment to the employee 401K plan.
Other non-interest expense increased $495,000, or 43.3%, primarily due to an
increase in advertising and public relations, resulting from increased marketing
efforts of loan and deposit products. Also contributing to the increase in other
expense were increases in general operating expenses, the provision for REO, and
tax expense associated with the corporation formed March 31, 1998, as well as
amortization of goodwill associated with branch and subsidiary acquisitions.
Professional fees increased $410,000 due to an increased amount of legal, audit
and consulting fees associated with being a public company. Data processing
increased $163,000 due to depreciation expense related to the installation of
new teller and mainframe hardware and software.
Income taxes. The Company had income tax expense of $973,000 for the nine months
ended June 30, 1999, compared to a benefit of $736,000 for the nine months ended
June 30, 1998, resulting in an effective tax rate of 21.3% for the nine months
Page 25
<PAGE>
ended June 30, 1999. The primary reason that the 1999 effective tax rate for the
nine month period is substantially below the statutory tax rate is the level of
tax-free income generated by the Company's tax free securities. The increase in
income tax expense was attributable to the increase in income before taxes for
the nine months ended June 30, 1999. The benefit for income taxes in the prior
year relates to the net operating loss generated by the one-time charitable
contribution to the Foundation.
Page 26
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Part I, Item 2, Sections C, D and E on
pages 15-17, inclusive.
Page 27
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the
Company's financial condition or results of operation.
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
None.
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.*
4.0 Form of Stock Certificate of Northeast Pennsylvania
Financial Corp.*
11.0 Statement regarding Computation of Per Share Earnings
(See Notes to Consolidated Financial Statements)
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
Page 28
<PAGE>
On April 20, 1999, the Company filed an 8-K to announce its
earnings for the second quarter and to announce it had received
approval to repurchase 5% of its outstanding shares. The press
release announced the Company's earnings and the approval of the
stock repurchase was filed by exhibit.
On April 21, 1999, the Company filed an 8-K to announce the
establishment of a dividend reinvestment plan and to declare a
cash dividend. The press release announcing the Company's
establishment of the dividend reinvestment plan and the
declaration of a cash dividend were filed by exhibit.
On April 26, 1999 the Company filed an 8-K to announce it had
completed its repurchase of 5% of its outstanding shares. The
press release announcing the completion of the stock repurchase
was filed by exhibit.
Page 29
<PAGE>
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 13, 1999 By: /s/ E. Lee Beard
E. Lee Beard
President and Chief Executive Officer
Date: August 13, 1999 By: /s/ Patrick J. Owens, Jr.
Patrick J. Owens, Jr.
Chief Financial Officer and Treasurer
<PAGE>
Exhibit Index
27.0 Financial Data Schedule (submitted only with filing in electronic format)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary 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-30-1999
<PERIOD-START> Oct-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,623
<INT-BEARING-DEPOSITS> 6,505
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,542
<INVESTMENTS-CARRYING> 28,330
<INVESTMENTS-MARKET> 28,820
<LOANS> 341,376
<ALLOWANCE> 2,520
<TOTAL-ASSETS> 589,187
<DEPOSITS> 364,480
<SHORT-TERM> 17,805
<LIABILITIES-OTHER> 5,386
<LONG-TERM> 125,484
0
0
<COMMON> 64
<OTHER-SE> 75,968
<TOTAL-LIABILITIES-AND-EQUITY> 589,187
<INTEREST-LOAN> 17,839
<INTEREST-INVEST> 6,464
<INTEREST-OTHER> 3,194
<INTEREST-TOTAL> 27,497
<INTEREST-DEPOSIT> 9,931
<INTEREST-EXPENSE> 14,267
<INTEREST-INCOME-NET> 13,230
<LOAN-LOSSES> 343
<SECURITIES-GAINS> 64
<EXPENSE-OTHER> 9,746
<INCOME-PRETAX> 4,566
<INCOME-PRE-EXTRAORDINARY> 4,566
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,593
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.62
<YIELD-ACTUAL> 7.33
<LOANS-NON> 1,053
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,273
<CHARGE-OFFS> (99)
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 2,520 <F1>
<ALLOWANCE-DOMESTIC> 2,135
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 385 <F2>
<FN>
1. Allowance for loan loss at end of period includes an increase in the
allowance through the provision for loan losses.
2. All unallocated is for domestic loans.
</FN>
</TABLE>
