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 December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-13793
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1504091
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification 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
6,308,950 shares of Common Stock outstanding as of February 9, 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
December 31, 1998 (unaudited) and September 30, 1998............... 1
Consolidated Statements of Operations for the Three Months Ended
December 31, 1998 and 1997 (unaudited)........................... 2-3
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1998 and 1997(unaudited)..............................4-5
Notes to Consolidated Financial Statements (unaudited)......... 6-11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 12-22
Item 3 Quantitative and Qualitative Disclosures about Market Risk......... 23
Part II - OTHER INFORMATION
1 Legal Proceedings................................................ 24
2 Changes in Securities and Use of Proceeds......................... 24
3 Defaults Upon Senior Securities................................... 24
4 Submission of Matters to a Vote of Security Holders............... 24
5 Other Information................................................ 24
6 Exhibits and Reports on Form 8 - K............................ 24-25
Signatures 26
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Financial Condition
December 31, 1998 (unaudited) and September 30, 1998
(in thousands, except share and per share data)
December 31, September 30,
1998 1998
Assets (unaudited)
Cash and cash equivalents $ 9,099 $ 3,053
Securities available-for-sale 188,743 189,094
Securities held-to-maturity (estimated fair
value of $25,239 at December 1998
and $32,072 at September 1998) 25,364 31,770
Loans (less allowance for loan losses of
$2,286 for December 1998 and $2,273
for September 1998) 284,264 282,706
Accrued interest receivable 3,715 3,998
Assets acquired through foreclosure 49 112
Property and equipment, net 8,782 8,648
Other assets 3,040 2,887
-------- ---------
Total assets $ 523,056 $ 522,268
========= =========
Liabilities and Equity
Deposits $ 321,178 $ 324,005
Federal Home Loan Bank advances 111,994 106,498
Other borrowings 518 825
Advances from borrowers for taxes and insurance 1,237 717
Accrued interest payable 826 1,028
Other liabilities 2,104 1,761
--------- ---------
Total liabilities $ 437,857 $ 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 62,115 62,083
Common stock acquired by stock benefit plans (7,940) (4,799)
Retained earnings - substantially restricted 28,386 27,208
Accumulated other comprehensive income 2,574 2,878
----- -------
Total equity $ 85,199 $ 87,434
--------- --------
Total liabilities and equity $ 523,056 $ 522,268
========= =========
1
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Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended December 31, 1998 and 1997 (unaudited)
(in thousands)
For the
Three months ended
December 31,
Interest Income: 1998 1997
---- ----
Loans $ 5,742 $ 5,269
Mortgage-related securities 1,205 711
Investment securities:
Taxable 1,364 807
Non-taxable 657 127
------- -----
Total interest income 8,968 6,914
Interest Expense:
Deposits 3,317 3,231
Federal Home Loan Bank advances and other 1,319 478
------- ------
Total interest expense 4,636 3,709
Net interest income 4,332 3,205
Provision for loan losses 47 267
------- -----
Net interest income after provision for loan losses 4,285 2,938
Non-interest Income:
Service charges and other fees 347 178
Gain (loss) on sale of:
Real estate owned (16) (35)
Loans 19 7
Available-for-sale securities 34 8
Other -- 2
------- --------
Total non-interest income 384 160
Non-interest Expense:
Salaries and net employee benefits 1,718 1,225
Occupancy costs 419 373
Federal deposit insurance premiums 72 72
Data processing 125 74
Professional fees 223 46
Federal Home Loan Bank service charges 101 76
Charitable contributions 8 125
Other 438 275
------- ------
Total non-interest expense 3,104 2,266
Income before income taxes 1,565 832
Income taxes 387 275
------- ------
Net income $ 1,178 $ 557
======= =======
2
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Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended December 31, 1998 and 1997 (unaudited)
(in thousands)
For the Three months ended
December 31, 1998
1998 1997
---- ----
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on
securities:
Unrealized holding gains (losses)
arising during the period $(326) $ 404
Less: Reclassification adjustment
for gains included in net income 22 5
----- -----
Other comprehensive income (loss) (304) 399
Comprehensive income $ 874 $ 956
===== =====
Earnings per share - basic $0.20 N/A
===== =====
Earnings per share - diluted $0.19 N/A
===== =====
3
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Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Three Months ended December 31, 1998 and 1997 (unaudited)
(in thousands)
For the Three Months Ended
December 31,
Operating Activities: 1998 1997
---- ----
Net Income $ 1,178 $ 557
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision (Recovery) for REO loss 3 (30)
Provision for loan losses 47 267
Depreciation 198 141
Deferred income tax (benefit) provision 142 (35)
ESOP expense 203 --
Amortization and accretion on:
Held-to-maturity securities 17 10
Available-for-sale securities 90 19
Amortization of deferred loan fees (111) (58)
(Gain) loss on sale of:
Real estate loans acquired through foreclosure 16 35
Loans (19) (7)
Available-for-sale securities (34) (8)
Gain on disposal of property and equipment -- (2)
Changes in assets and liabilities:
Increase (decrease) in accrued interest receivable 283 (205)
Increase in other assets (110) (293)
Decrease in accrued interest payable (202) (207)
Increase (decrease) in accrued income taxes payable (215) 311
Increase (decrease) in other liabilities 558 (334)
-------- ------
Net cash provided by operating activities 2,044 161
Investing Activities:
Loan origination and principal payments on loans (5,058) (3,770)
Proceeds from sale of:
Available-for-sale securities 1,305 --
Real estate acquired through foreclosure and
repossessed assets 102 57
Loans 3,525 484
Proceeds from repayments of available-for-sale
securities 28,612 8,575
Proceeds from repayments of held-to-maturity securities 15,953 5,479
Proceeds from disposal of fixed assets -- 2
Purchase of:
Available-for-sale securities (29,836) (20,429)
Held-to-maturity securities (9,564) (15,104)
Office properties and equipment (332) (192)
Federal Home Loan Bank stock (275) (422)
-------- ------
Net cash provided by (used in) investing activities 4,432 (25,320)
4
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For the Three Months
Ended December 31,
1998 1997
---- ----
(unaudited)
Financing Activities:
Net decrease in deposit accounts (2,827) (10,004)
Net increase in Federal Home Loan Bank
short-term advances 5,500 11,000
Borrowings of Federal Home Loan Bank
long-term advances -- 15,000
Repayments of Federal Home Loan Bank
long-term advances (4) (4)
Net increase in advances from borrowers for taxes
and insurance 520 367
Net increase (decrease) in other borrowings (307) 123
Purchase of common stock for stock incentive plan (3,312) --
-------- -------
Net cash provided by (used in) financing activities (430) 16,482
Increase (decrease) in cash and cash equivalents 6,046 (8,677)
Cash and cash equivalents, beginning of year 3,053 13,214
-------- -------
Cash and cash equivalents, end of year $ 9,099 $ 4,537
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,838 $ 3,916
======== ========
Income taxes $ 451 --
======== ========
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax $ (304) $ 399
======== ========
Supplemental disclosure - non-cash and financing
information:
Transfer from loans to real estate owned $ 58 $ 44
======== ========
ESOP shares committed to be released $ 171 --
======== ========
5
<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 three months ended December 31, 1998 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 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
FIDACO, Inc., Abstractors, Inc., and First Federal Bank. First Federal Bank and
Abstractors, Inc. are wholly-owned subsidiaries of Northeast Pennsylvania
Financial Corp. FIDACO, Inc. is an inactive subsidiary of First Federal Bank
with the only major asset being an investment in Hazleton Community Development
Corporation. Abstractors, Inc. is a title insurance agency. 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 $0.20 and $0.19, respectively for
the three months ended December 31, 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
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The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
Three Months Ended
Dec. 31, Dec. 31,
1998 1997
Net Income $ 1,178 --
===== ===
Basic:
Weighted average shares outstanding 6,427,350 --
Less: Unallocated/unearned shares held
by stock benefit plans (600,818) --
Plus: ESOP shares released or
committed to be released
42,849 --
--------- ---
5,869,381 --
========= ===
Earnings per share - basic $ 0.20 N/A
========= ===
Dec. 31, Dec. 31,
1998 1997
Diluted:
Net Income $1,178 --
====== ==
Basic weighted shares outstanding 5,869,381
Dilutive Instruments:
Dilutive effect of outstanding stock
options using treasury method
2,573 --
Dilutive effect of stock awards 174,821 --
------- ---
6,046,775 --
========= ===
Earnings per share - diluted $0.19 N/A
===== ===
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
7
<PAGE>
effective for fiscal years beginning after December 15, 1997. The Company has
adopted SFAS 130 in the current quarter and has made appropriate disclosures in
the applicable consolidated financial statements.
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 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 adopted SFAS 133 in its fiscal fourth quarter of 1998,including its
8
<PAGE>
provision for the reclassification of investments, resulting in a $56.2 million
transfer of securities from held-to-maturity to available-for-sale.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. This Statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after January 30, 1999 with earlier adoption permitted. This Statement
provides a one-time opportunity for an enterprise to reclassify, based on the
ability and intent on the date of adoption of this Statement, mortgage-backed
securities and other beneficial interests retained after securitization of
mortgage loans held for sale from the trading category, except for those with
commitments in place. The Company has not yet determined the impact, if any, of
this Statement, including, if applicable, its provisions for the potential
reclassifications of certain 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 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
9
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balances of eligible deposits decreases at the annual determination dates,
approximated $28.5 million 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 December 31, 1998, there were no shares of
preferred stock issued.
10
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4. Loans
Loans are summarized as follows: December 31, September 30,
1998 1998
(unaudited)
Real Estate loans:
One-to four-family $ 174,873 $ 176,924
Multiple family and commercial 12,759 11,938
Construction 3,571 3,759
--------- ---------
Total real estate loans 191,203 192,621
--------- ---------
Consumer Loans:
Home equity loans and lines of credit 54,522 52,244
Automobile 23,908 24,589
Education 2,328 2,351
Unsecured lines of credit 1,618 1,589
Other 3,298 3,423
--------- ---------
Total consumer loans 85,674 84,196
--------- ---------
Commercial loans 11,260 9,742
--------- ---------
Total loans 288,137 286,559
--------- ---------
Less:
Allowance for loan losses (2,286) (2,273)
Deferred loan origination fees (1,587) (1,580)
--------- ---------
Total loans, net $ 284,264 $ 282,706
========= =========
For the three For the year
months ended ended
December 31, September 30,
1998 1998
Balance, beginning of period 2,273 1,272
Charge-offs (35) (76)
Recoveries 1 18
Provision for loan losses 47 1,059
------- -------
Balance, end of period $ 2,286 $ 2,273
======= =======
5. Deposits
<TABLE>
Deposits consist of the following major classifications (in thousands):
<CAPTION>
December 31, 1998 September 30, 1998
Percent Percent
Amount of Total Amount of Total
<S> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) $ 68,766 21.4% $ 69,956 21.6%
Money market accounts 18,254 5.7% 16,368 5.0%
Certificates of deposit less than $100,000 165,067 51.4% 163,318 50.5%
Certificates of deposit greater than $100,000(1) 25,033 7.8% 32,750 10.1%
NOW Accounts 32,177 10.0% 31,182 9.6%
Non-interest bearing deposits 11,881 3.7% 10,431 3.2%
-------- ----- -------- --------
Total deposits at end of period $321,178 100% $324,005 100%
======== ======= ======== ========
<FN>
(1) Deposit balances in excess of $100,000 are not federally insured.
</FN>
</TABLE>
11
<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.
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
12
<PAGE>
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. The Bank
has a signed letter of intent to purchase approximately $5.4 million of
adjustable rate mortgages, with a five year fixed rate, adjusting annually
thereafter, with an expected yield to the Bank of 6.375%. The acquisition of the
mortgages is expected to be completed in the second fiscal quarter. The Bank is
selling longer-term, fixed-rate one-to four-family loans which it originates in
excess of its retention policy for such loans in the secondary market.
Previously, as a result of its policy to limit its retention of newly originated
longer-term, fixed-rate one-to four-family loans to 25% 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.
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. 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 originated with
terms greater than 15 years, which exceeds the first 25% of originations in the
given year, 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
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<PAGE>
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. 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. At December 31, 1998, the Bank's cumulative one year gap was a negative
2.0% 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. December's interest rate sensitivity gap reflects the
repayment of short term borrowings 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.
14
<PAGE>
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
December 31, 1998.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Net PortfolioValue Value of Assets
Interest Rates -------------------------------------------------------- -------------------------------
In Basis Points NPV
(Rate Shock) Amount $ Change % Change Ratio Change (1)
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 36,795 (28,322) (43.49%) 7.85% (502)
200 47,042 (18,075) (27.76%) 9.77% (310)
100 56,894 (8,223) (12.63%) 11.51% (136)
Static 65,117 0 0.00% 12.87% 0
-100 71,010 5,893 9.05% 13.75% 88
-200 75,550 10,433 16.02% 14.35% 148
-300 81,518 16,401 25.19% 15.14% 227
<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.
15
<PAGE>
F. Non-Performing Assets
The following table presents information regarding the Bank's non-performing
assets at the dates indicated:
December 31, September 30,
1998 1998
---- ----
Non-performing loans:
Non-accrual loans $1,306 $1,239
Real estate owned and other repossessed assets 49 112
------ ------
Total non-performing assets $1,355 $1,351
====== ======
Total non-performing loans as a
percentage of total loans 0.46% 0.44%
Total non-performing assets as a
percentage of total assets 0.26% 0.26%
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 December 31, 1998 and 1997, the Bank's liquidity ratios were
8.97% and 4.52%, respectively.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $56.1 million, or 11.3%, of total
adjusted assets, which is above the required level of $ 7.4 million, or 1.5%;
core capital level of $56.1 million or 11.3% of total adjusted assets, which is
above the required level of $14.8 million, or 3.0%; and risk-based capital of
$58.4 million or 23.3% of risk-weighted assets, which is above the required
level of $20.0 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 December 31, 1998, cash and cash
equivalents and investment and mortgage-related securities available-for-sale
totaled $197.8 million, or 37.8%, of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At December 31, 1998, the Bank had $112.0 million in
advances outstanding from the FHLB, and had an additional overall borrowing
capacity from the FHLB of $240.1 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 December 31, 1998, the Bank had commitments to originate and purchase loans
and unused outstanding lines of credit and undisbursed proceeds of construction
16
<PAGE>
mortgages totaling $38.4 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 December 31, 1998, totaled $132.3 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 December 31, 1998, the Bank had $21.7 million in jumbo certificates
which will be evaluated at maturity.
To improve its customer delivery systems and expand its services, the Bank has
been investing in new computer hardware and software during late fiscal 1998 and
may expand branch facilities. The Bank's Columbia Mall branch is in the process
of relocating to a new location in Scott Township. It is anticipated the
relocation will occur in January 1999. The Bank anticipates that during fiscal
1998 and 1999, it will have incurred capital expenditures of approximately $2.4
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 December 31, 1998, the Bank had total equity, determined in
accordance with generally accepted accounting principles, of $58.6 million, or
11.8%, of total assets, which approximated the Bank's regulatory tangible
capital at that date of 11.3% 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, whose oversight includes complying with specific timetables,
17
<PAGE>
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 is maintaining 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 its vendor for mission critical
software systems that the system was compliant by June 30, 1998. The Company has
substantially completed testing its mission critical systems at December 31,
1998. If testing were to present any system problems, the vendor will work to
correct the problem and the Company will test again until resolved. At the same
time, the Company is 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 intends to fully test that software by
March 31, 1999.
The Company has initiated communications 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. By March 31, 1999, the Company expects to have communicated with
all significant vendors. In the event that any of the Company's significant
vendors, suppliers and large commercial customers 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. However, for any insignificant vendor who responds that
they will not be compliant by March 1999, the Company will seek a new vendor or
system that is compliant. 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.
A contingency plan will be developed for mission-critical and required mainframe
and PC based applications, third-party relationships, environmental systems,
proprietary programs and non-computer related systems. This contingency plan
will identify scheduled completion dates, test dates and trigger dates.
18
<PAGE>
Business continuation plans for critical business applications are in place.
These plans include adequate staffing on site during the year 2000 date change
to quickly repair any errant applications. In addition, in the event of any
problems the Company would follow its current computer outage 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 while providing for internal efficiencies
and customer service improvement. The Technology Plan has resulted in
positioning the Company to continue its technology improvements while avoiding
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.
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, be it a supplier of services or a customer,
the Y2K issue could possibly have a material effect on the Company's operations
and financial position.
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.
19
<PAGE>
I. Comparison of Financial Condition at December 31, 1998 and September 30, 1998
Total assets increased by $788,000, from $522.2 million at September 30, 1998 to
$523.0 million at December 31, 1998. The growth in assets was primarily due to
increases in cash and cash equivalents and loans receivable, offset by decreases
in investment securities.
Cash and cash equivalents increased $6.1 million to $9.1 million at December 31,
1998 from $3.0 million at September 30, 1998 due to the net effect of called
securities, increased FHLB advances and a decrease in deposits.
Securities classified as held-to-maturity decreased $6.4 million, or 20.2%, to
$25.4 million at December 31, 1998, while securities available-for-sale
decreased from $189.1 million at September 30, 1998 to $188.7 million at
December 31, 1998. These decreases were primarily attributable to the effect of
called securities, net of security purchases.
Loans increased $1.6 million to $284.3 million at December 31, 1998. This was
primarily due to a $2.6 million increase in home equity loans resulting from
increased marketing efforts and competitive pricing of such loans, combined with
an increase of $1.5 million in other commercial loans. These increases were
offset by declines in one-to four-family mortgage loans and automobile loans of
$2.0 million and $681,000, respectively.
Accrued interest receivable decreased $283,000, to $3.7 million at December 31,
1998. This was due to decreases in investment and mortgage-related security
balances, offset by an increase in loans receivable.
Total deposits decreased $2.8 million to $321.2 million at December 31, 1998.
The decrease in deposits was the result of a $7.7 million decrease in jumbo
certificates of deposit from $32.8 million at September 30, 1998 to $25.0
million at December 31, 1998, primarily due to the maturity of jumbo
certificates. This decrease was offset by increases in money market accounts of
$1.9 million, non-interest bearing demand accounts of $1.4 million, and
certificates of deposit less than $100,000 of $1.7 million resulting from a more
active solicitation of such accounts.
FHLB advances increased $5.5 million from $106.5 million at September 30, 1998
to $112.0 million at December 31, 1998. This was a result of management's
determination to place increased emphasis on the utilization of FHLB borrowings
to fund asset growth. FHLB borrowings can be invested at yields higher than the
cost of the borrowed funds thereby increasing net interest income.
Total equity decreased $2.2 million to $85.2 million at December 31, 1998. This
decrease in equity resulted primarily from the establishment of a $3.3 million
liability for unearned stock awards, offset by the $1.2 million net income for
the current period.
20
<PAGE>
Comparison of Operating Results for the Three Months ended December 31, 1998
and December 31, 1997
General. The Company had net income of $1.2 million for the three months ended
December 31, 1998, compared to net income of $557,000 for the three months ended
December 31, 1997, an increase of $621,000. This increase was primarily
attributable to a $2.1 million rise in interest income, offset by increases in
interest expense and non-interest expense of $927,000 and $838,000,
respectively.
Interest Income. Total interest income increased by $2.1 million , or 29.7%,
from $6.9 million for the three months ended December 31, 1997 to $9.0 million
for the three months ended December 31, 1998. This was primarily due to a $135.7
million, or 36.7%, 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 securities increased $1.6 million to $3.2 million for
the three months ended December 31, 1998 primarily due to a $116.2 million
increase in average balances of securities.
Interest income on loans increased $473,000. This was primarily due to an
increase in interest income on consumer loans of $495,000 from $1.3 million for
the period ending December 31, 1997 to $1.8 million principally due to a $22.3
million, or 35.8% increase in the average balance of consumer loans from $62.3
million to $84.6 million for the three months ended December 31, 1997 and
December 31, 1998, respectively. Interest income on mortgage-related securities
increased $494,000, or 69.5%, to $1.2 million at December 31, 1998, due to the
average balance increasing $31.1 million to $76.7 million for the period ended
December 31, 1998.
Interest Expense. Interest expense increased $927,000, or 25.0%, from $3.7
million to $4.6 million for the three months ended December 31, 1997 and
December 31, 1998, respectively. The increase in interest expense was primarily
the result of a $66.0 million increase in the average balance of FHLB advances
and other borrowings, which increased from $34.0 million at December 31, 1997 to
$100.0 million at December 31, 1998. This increase reflects management's
determination to more heavily utilize FHLB advances to fund asset growth.
Contributing to this change is an increase in interest expense on certificate of
deposit accounts, which was the result of a $9.5 million increase in the average
balances of these accounts.
Provision for Loan Losses. The Bank's provision for loan losses for the three
months ended December 31, 1998 was $47,000 compared to $267,000 for the three
months ended December 31, 1997. 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. The allowance is
increased by the provision for loan losses which is charged to operations. Loan
21
<PAGE>
losses, other than those incurred on loans held for sale, are charged directly
against the allowance and recoveries on previously charged-off loans are
generally added to the allowance.
Non-interest Income. Non-interest income increased $224,000 from $160,000 to
$384,000 for the three months ended December 31, 1997 and December 31, 1998,
respectively. The increase in non-interest income was primarily due to an
increase in service charges and other fees from $178,000 to $347,000 for the
three months ended December 31, 1997 and December 31, 1998, respectively,
primarily due to increased customer activity on the various deposit and loan
accounts.
Non-interest Expense. Total non-interest expense increased from $2.3 million to
$3.1 million for the three months ended December 31, 1997 and December 31, 1998,
respectively. This increase was due primarily to an increase in compensation and
employee benefits of $493,000, or 40.2%, to $1.7 million for the three months
ended December 31, 1998, from $1.2 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 and stock award program. Professional fees
increased $177,000 due to increased legal and accounting fees associated with
being a public company.
Income Taxes. The Company had an income tax expense of $387,000 for the three
months ended December 31, 1998, compared to an expense of $275,000 for the three
months ended December 31, 1997 resulting in effective tax rates of 24.7% and
33.0%, respectively. The increase in income tax expense was attributable to the
increase in income before taxes for the three months ended December 31, 1998.
The decline in the effective tax rate was the result of increased tax-free
security purchases.
22
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Part I, Item 2, Sections C and D on pages
13-15, inclusive.
23
<PAGE>
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
On October 21, 1998, the Company held a special meeting of
shareholders to vote on the approval of the Northeast Pennsylvania
Financial Corp. 1998 Stock-Based Incentive Plan. The number of
votes cast at the meeting was:
Number of Votes For Number of Votes Against Abstentions
------------------- ----------------------- -----------
3,786,646 438,128 33,463
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.*
10.1 Form of First Federal Bank Supplemental Executive Retirement
Plan*
10.2 Form of First Federal Bank Employee Severance Compensation Plan*
10.3 Form of First Federal Bank Management Supplemental Executive
Retirement Plan*
24
<PAGE>
10.4 Northeast Pennsylvania Financial Corp. 1998 Stock-Based
Incentive Plan**
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.
** Incorporated herein by reference into this document from the Proxy
Statement for the 1998 Special Meeting of Shareholders dated
September 9, 1998.
(B) Reports on Form 8-K
On October 16, 1998 the Company filed an 8-K to announce its 1999
Annual Meeting of Shareholders. The press release announcing the
Company's Annual Meeting was filed by exhibit.
On October 26, 1998 the Company filed an 8-K to announce its earnings
for the quarter and year ended September 30, 1998. The press release
announcing the Company's earnings was filed by exhibit.
On November 27, 1998 the Company filed an 8-K to announce it had
received regulatory clearance to repurchase 5% of its outstanding
shares. The press release announcing the receipt of regulatory
clearance was filed by exhibit.
25
<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: February 11, 1999 By: /s/ E. Lee Beard
---------------------------------- E. Lee Beard
President and Chief Executive
Officer
Date: February 11, 1999 By: /s/ Patrick J. Owens, Jr.
-------------------------------- Patrick J. Owens, Jr.
Chief Financial Officer and
Treasurer
26
<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> Northeastern Pennsylvania Financial Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,338
<INT-BEARING-DEPOSITS> 7,761
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 188,743
<INVESTMENTS-CARRYING> 25,364
<INVESTMENTS-MARKET> 25,239
<LOANS> 284,264
<ALLOWANCE> 2,286
<TOTAL-ASSETS> 523,056
<DEPOSITS> 321,178
<SHORT-TERM> 518
<LIABILITIES-OTHER> 4,167
<LONG-TERM> 111,994
0
0
<COMMON> 64
<OTHER-SE> 85,135
<TOTAL-LIABILITIES-AND-EQUITY> 523,056
<INTEREST-LOAN> 5,742
<INTEREST-INVEST> 2,021
<INTEREST-OTHER> 1,205
<INTEREST-TOTAL> 8,968
<INTEREST-DEPOSIT> 3,317
<INTEREST-EXPENSE> 4,636
<INTEREST-INCOME-NET> 4,332
<LOAN-LOSSES> 47
<SECURITIES-GAINS> 34
<EXPENSE-OTHER> 3,104
<INCOME-PRETAX> 1,565
<INCOME-PRE-EXTRAORDINARY> 1,565
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,178
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
<YIELD-ACTUAL> 7.34
<LOANS-NON> 1,306
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,273
<CHARGE-OFFS> (35)
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2,286 <F1>
<ALLOWANCE-DOMESTIC> 1,760
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 526 <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>
