FORM 10-K
UNITED STATES
SECURlTIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________to__________
Commission File Number 1-13793
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NORTHEAST PENNSYLVANIA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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DELAWARE 06-1504091
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201-6591
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (570) 459-3700
Securities registered under Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 ___
Indicate by a check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
The aggregate market value of the voting and non-voting stock held by non
affiliates of the registrant i.e., persons other than directors and executive
officers of the registrant is $49.8 million and is based on the last sales price
as quoted on the American Stock Exchange for December 20, 1999.
The number of shares of common stock outstanding as of December 20, 1999 was
5,716,983.
(1) Portions of the Annual Report to Shareholders for the year ended September
30, 1999 are incorporated by reference into Part I, Part II, Part III and
Part IV of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2000 Annual Meeting of
Shareholders are incorporated by reference into Part I and Part III of this
Form 10-K.
<PAGE>
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
FORM 10-K
TABLE OF CONTENTS
Part I Page
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Item 1 Business 1-12
Item 2 Properties 13-14
Item3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
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Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 15
Part III
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Item 10 Directors and Executive Officers of the Registrant 16
Item 11 Executive Compensation 16
Item 12 Security Ownership of Certain Beneficial Owners and Management 16
Item 13 Certain Relationships and Related Transactions 16
Part IV
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Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 17-18
SIGNATURES 19
<PAGE>
Part I
Forward Looking Statements
In addition to historical information, our 10-K may include certain
"forward-looking statements" within the meaning of the federal securities laws.
These forward-looking statements include, but are not limited to, estimates and
expectations of future performance based on current management expectations.
Northeast Pennsylvania Financial Corp. (the "Company") 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 regulation 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 Company'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. Because of the risks and uncertainties
inherent in forward-looking statements, readers are cautioned not to place undue
reliance on them, whether included in this report or made elsewhere from time to
time by the Company or on its behalf. The Company assumes no obligation to
update any forward-looking statements.
Item 1. Business
General
The Company is a Delaware Corporation and 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 Company's
executive offices are located at 12 East Broad Street, Hazleton, Pennsylvania
18201.
The Bank was organized in 1935 as a federally chartered savings and
loan association. On March 31, 1998, the Bank's predecessor converted from a
federally chartered savings and loan association to a federally chartered
capital stock savings bank and changed its name to First Federal Bank (the
"Conversion"). On March 31, 1998, the Company acquired the Bank as part of the
Conversion. At September 30, 1999, the Company had total assets of $612.2
million, deposits of $376.0 million and stockholder's equity of $75.5 million.
The Company's operations are conducted through the Bank. These
operations have been and continue to be attracting retail deposits from the
general public in the areas surrounding its 13 banking offices and investing
those deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family mortgage loans, consumer loans, and
multi-family and commercial loans. The Company currently originates, primarily
for investment, adjustable-rate and shorter-term (15 years or less) fixed rate
one- to four-family mortgage loans. Since the Company has a policy to limit its
retention of newly originated longer-term, fixed-rate one- to four-family loans
to 25% of total originations for a fiscal year, periodically the Company has had
to limit its origination of such loans. The Company's policy is to resell in the
secondary market of longer-term fixed-rate one- to four-family mortgage loans
originated in excess of its retention limit. The Company also offers as
nonconforming or subprime one- to four-family loans, a variety of consumer
loans, including home equity loans, home equity lines of credit, direct and
indirect automobile loans and education loans, and commercial loans. To a lesser
extent, the Company also originates multi-family and commercial real estate
loans and construction loans. The Company also invests in mortgage-related
securities and investment securities, primarily U.S.government and agency and
municipal obligations, and other permissible investments.
The Company's revenues are derived principally from interest on its
loans, and to a lesser extent, interest and dividends on its investment and
mortgage-related securities and other non-interest income. The Company's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage related securities, FHLB advances and proceeds from the sale of loans.
Market Area and Competition
The Company is a community-oriented banking institution offering a
variety of financial products and services to meet the needs of the communities
it serves. The Company's lending and deposit gathering is concentrated in its
market area consisting of Luzerne, Carbon, Columbia, Monroe, Montour and
Schuylkill counties in Northeastern and Central Pennsylvania. The Company
invests primarily in loans secured by first or second mortgages on properties
located in areas surrounding its offices.
The Company maintains its headquarters in Hazleton and five other banking
offices in Luzerne County. The Company's six offices in Luzerne County,
including Hazleton, accounted for $187.6 million or 49.9% of the Company's total
deposits at September 30, 1999. Hazleton is situated approximately 100 miles
from Philadelphia and New York City and approximately 50 miles from Allentown
and the WilkesBarre/Scranton area. The Company also maintains two banking branch
offices in Bloomsburg (Columbia County), one in Lehighton (Carbon County), one
in Danville (Montour County), and one each in Frackville, Pottsville and
Shenandoah (all in Schuylkill County). The Company also operates a loan
production office in Pocono Pines in Monroe County.
Page 1
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The economy of the greater Hazleton area is characterized by
diversified light manufacturing and is the site of production facilities for
several major manufacturers including Union Camp, Hershey-Cadbury Chocolates,
Quebecor and Hazleton Pumps, Inc. As a consequence, the manufacturing sector
employs more than one third of the area's work force. The Hazleton area has
excellent access to major highway transportation routes including Interstates 80
and 81 as well as rail transportation. The population of Luzerne County has
remained relatively static and has one of the oldest average ages for all
counties in the United States. The overall population in the Company's market
area is relatively small and, in recent years, has grown slowly, and the
unemployment rate in the area is greater than the national average.
Monroe County, the location of the Pocono Pines loan production office, is
dominated by the Pocono Mountains, making the area one of the Middle-Atlantic's
most popular resort areas. The Pocono Mountains, with their ski areas and other
recreational facilities, draw vacationers primarily from Eastern Pennsylvania,
New Jersey, Maryland, and New York. The Company established its loan production
office to take advantage of the market for vacation properties existing in
Monroe County as well as to be involved in the growth in the number of permanent
residents relocating into the county.
The Company faces significant competition both in generating loans and
in attracting deposits. The Company's primary market area is highly competitive
and the Bank faces direct competition from a significant number of financial
institutions, many with a state wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from savings banks and
associations, commercial banks and credit unions. In addition, the Bank faces
increasing competition for deposits from non-bank institutions such as brokerage
firms and insurance companies in such instruments as short-term money market
funds, corporate and government securities funds, mutual funds and annuities.
Competition may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions.
In addition, the Company recognizes that its customer base increasingly
focuses on convenience and access to services. The Company has addressed these
customer desires through the implementation of PC banking and voice response
capabilities, a computerized loan origination and document system and the
issuance of debit cards. The Company intends to continue to evaluate and enhance
its service delivery system.
LENDING ACTIVITIES
General. The information relating to the composition and maturity of
the Bank's loan portfolio appears in "Loans" on pages 16 and 17 of the Company's
1999 Annual Report to Shareholders and is incorporated herein by reference.
Origination and Sale of Loans. The Bank's mortgage lending activities
are conducted primarily by its loan personnel operating at its branch and loan
origination offices. All loans originated by the Bank are underwritten pursuant
to the Bank's policies and procedures. For fiscal l999 and 1998, the Bank
originated $180.9 million and $91.9 million in loans, respectively. The Bank
originates both adjustable-rate and longer-term and shorter-term fixed-rate
loans. The Bank's ability to originate fixed- or adjustable-rate loans is
dependent upon the relative customer demand for such loans, which is affected by
the current and expected future level of interest rates.
It currently is the policy of the Bank to retain for investment
longer-term (greater than 15 years to maturity at date of origination)
fixed-rate one- to four- family loans originated during a fiscal year only up to
25% of its total loan originations during that year. In addition, the Bank
generally retains the adjustable rate and shorter-term (maturities of 15 years
or less) fixed-rate loans originated. The Company has implemented a program to
sell in the secondary market longer-term, fixed-rate one- to four-family loans
which it could originate in excess of its retention policy for such loans.
During fiscal years 1999 and 1998 the Bank originated or purchased
$65.5 million and $19.8 million, respectively, of one- to four-family mortgage
loans. In addition, during fiscal years 1999 and l998, the Bank originated $11.3
million and $12.0 million, respectively, of construction loans. Approximately
100% of such construction loans were for owner financing of single family
properties, which, upon completion of the construction phase, generally would
convert to permanent financing. Also, the Bank originated $6.2 million and $6.5
million, respectively, of multi-family and commercial real estate loans during
fiscal l999 and l998.
Also, during fiscal 1999 and 1998, respectively, the Bank originated or
purchased $54.8 million and $48.0 million of consumer loans. These originations,
during fiscal 1999 and 1998, consisted of $25.0 million and $26.7 million,
respectively, of home equity loans, $3.5 million and $2.8 million, respectively,
of home equity lines of credit, $21.5 million and $13.3 million, respectively,
of direct and indirect automobile loans, $1.9 million and $1.7 million,
respectively, of education loans, and $2.9 million and $3.5 million,
respectively, of other consumer loans.
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In addition, during fiscal l999 and 1998 respectively, the Bank
originated $43.1 million and $5.6 million of commercial loans. These
originations consisted primarily of commercial business and municipal loans.
The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated:
<TABLE>
For the Fiscal Years Ended September 30,
----------------------------------------
(In Thousands)
1999 1998 1997
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<S> <C> <C> <C>
Loans at beginning of period $290,564 $268,972 $250,142
Originations or Purchases:
Real estate:
One- to four-family 65,456 19,790 17,698
Multi-family and commercial 6,190 6,513 2,055
Construction 11,334 11,965 14,151
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Total real estate loans 82,980 38,268 33,904
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Consumer:
Home equity loans and lines of credit 28,457 29,512 16,710
Automobile 21,527 13,274 8,912
Education 1,929 1,743 1,658
Unsecured lines of credit 507 741 837
Other 2,351 2,761 2,671
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Total consumer loans 54,771 48,031 30,788
Commercial 43,138 5,602 7,426
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Total loans orginated 180,889 91,901 72,118
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Deduct:
Principal loan repayments and prepayments 94,508 65,727 56,032
Loan sales 8,219 8,365 1,789
Transfers to REO 251 222 201
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Sub-total 102,978 74,314 58,022
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Net loan activity 77,911 17,587 14,096
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Loans at end of period (1) $368,475 $286,559 $264,238
======== ======== ========
<FN>
(1) Loans at end of period include loans in process of $4,324, $4,005 and $4,734
for fiscal years l999, 1998 and 1997, respectively.
</FN>
</TABLE>
One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage ("ARM") loans with maturities of up to
30 years secured by one- to four-family residences. One- to four-family mortgage
loan originations are generally obtained from the Bank's in-house loan
representatives, from existing or past customers, and through referrals from
members of the Bank's local communities.
The origination of adjustable-rate mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally pose
credit risks not inherent in fixed-rate loans, primarily because as interest
rates rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
help to reduce the credit risks associated with adjustable-rate loans but also
limit the interest rate sensitivity of such loans.
Most one- to four-family mortgage loans are underwritten according to
Fannie Mae and Freddie Mac guidelines. Recently, the Bank began offering one- to
four-family mortgage loans to borrowers whose credit does not fully meet
established Fannie Mae or Freddie Mac standards, for example, income to debt
ratios for the borrower ("subprime loans"). Mortgage loans originated by the
Bank generally include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event the
borrower transfers ownership of the property without the Bank's consent.
Due-on-sale clauses are an important means of adjusting the yields on the Bank's
fixed-rate mortgage loan portfolio and the Bank has generally exercised its
rights under these clauses. The Bank requires fire, casualty, title and, in
certain cases, flood insurance on all properties securing real estate loans made
by the Bank.
Page 3
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Multi-Family and Real Estate Lending. The Bank originates fixed-rate
and adjustable- rate multi-family and commercial real estate loans that
generally are secured by properties used for business purposes or a combination
of residential and retail purposes.
Pursuant to the Bank's underwriting policies a multi-family mortgage
and commercial real estate loan may be made in an amount up to 80% of the lower
of the appraised value or sales price of the underlying property with terms
generally ranging from 15 to 25 years.
The factors considered by the Bank in granting these loans include: the
net operating income of the mortgaged premises before debt service and
depreciation; the debt coverage ratio (the ratio of net earnings to debt
service); and the ratio of loan amount to appraised value. The Bank has
generally required that the properties securing commercial real estate loans
have debt service coverage ratios of at least 125%.
Construction Lending. The Bank also offers residential construction
loans. Such loans primarily have been for presold one- to four-family residences
for the construction phase and convert into permanent financing. The Bank
generates residential construction loans primarily through direct contact with
the borrower or home builders, and these loans involve properties located in the
Bank's market area. Such loans require that the Bank review plans,
specifications and cost estimates and that the contractor be known to the Bank
to be reputable. The amount of construction advances to be made, together with
the sum of previous disbursements, may not exceed the percentage of completion
of the construction. The maximum loan-to-value limit applicable to such loans is
80%.
Consumer Lending. The Bank offers consumer loans which include home
equity loans, home equity lines of credit, direct and indirect automobile loans,
education loans and other consumer loans. The Bank's home equity loans are
generated primarily through the Bank's retail offices. The Bank generally offers
home equity loans with a term of 180 months or less. The Bank also offers home
equity lines of credit with terms up to 20 years, the last 10 years of which
require full amortization of the principal balance. The maximum loan amount for
both home equity loans and home equity lines of credit, is subject to a combined
loans-to-value ratio of 80%. Consumer loans tend to bear higher rates of
interest and have shorter terms to maturity than first lien residential mortgage
loans; however nationally, consumer loans have historically tended to have a
higher rate of default.
The Bank also offers automobile loans, both on a direct and an indirect
basis (through new and used car dealers). The indirect automobile loans are
originated by dealers in accordance with underwriting standards pre-established
by the Bank and are serviced by the Bank. The Bank also offers loans on
recreational vehicles and boats and other consumer loans including education
loans which are federally guaranteed and originated under regulations of the
Pennsylvania Higher Education Assistance Agency, deposit-secured loans, and
other personal and unsecured loans. The Bank's policy is to sell its education
loans once the borrower has left school to Sallie Mae with servicing released.
Commercial Lending. The Bank makes commercial business loans primarily in
its market area to a variety of professionals, sole proprietorships and small
businesses. The Bank offers a variety of commercial lending products, including
term loans for fixed assets and working capital, revolving lines of credit,
letters of credit, and Small Business Administration guaranteed loans. Interest
rates charged generally float based on the prime rate as published in the Wall
Street Journal. Prior to making commercial business loans, the borrower is
required to provide the Bank with sufficient information to allow a prudent loan
decision to be made. Such information generally includes financial statements
and projected cash flows, and is reviewed to evaluate debt service capability.
Commercial business loans are generally secured by a variety of collateral,
primarily real estate, and frequently are supported by personal guarantees. In
addition, the Bank actively participates in industrial loans arranged through
and with the Greater Wilkes-Barre Industrial Fund and CanDo, Inc. a Hazleton
area industrial fund.
Commercial business loans generally involve higher credit risks than
loans secured by real estate. Unlike mortgage loans, which generally are made on
the basis of the borrowers ability to make repayment from his or her employment
or other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself. Further, any collateral securing such loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and the levels of loan approvals of the Bank
and oversees the Bank's lending activity. The Board of Directors has established
a Loan Committee comprised of the Bank's Chairman of the Board of Directors,
President, Senior Vice President Lending, Senior Vice President Chief Financial
Officer and at least one outside director.
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Non-Performing Assets, Impaired Loans, Real Estate Owned and Allowance
for Loan Losses. The information relating to the Bank's non-performing assets,
impaired loans, real estate owned and allowance for loan losses appears on pages
17, 18 and 19 of the Registrant's 1999 Annual Report to Shareholders and is
incorporated herein by reference.
Investment Activities
The above captioned information appears in "Investment Activities" in the
Registrant's 1999 Annual Report to Shareholders on pages 15 and 16 and is
incorporated herein by reference.
Source of Funds
Information relating generally to the Bank's source of funds and a
description of the Bank's deposits appears under "Sources of Funds" in the
Registrant's 1999 Annual Report to Shareholders on pages 19 and 20 and is
incorporated herein by reference.
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as
an alternative to retail deposits to fund its operations as part of its
operating strategy. These FHLB advances are collateralized primarily by certain
of the Bank's mortgage loans and mortgage-related securities and secondarily by
the Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances
are made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. The maximum amount that the FHLB of
Pittsburgh will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the FHLB of Pittsburgh. See
"Regulation-Federal Home Loan Bank System." At September 30, l999, the Bank had
$156.0 million in outstanding FHLB advances, compared to $106.5 million at
September 30, 1998. Other borrowings consist of overnight retail repurchase
agreements and for the periods presented were immaterial.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
At or For the Fiscal Years Ended September 30,
----------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances and other borrowings:
Average balance outstanding $120,600 $52,531 $27,294
Maximum amount outstanding at any month-end
during the period 156,504 107,323 42,191
Balance outstanding at end of period 156,504 107,323 23,608
Weighted average interest rate during the period 5.23% 5.43% 5.48%
Weighted average interest rate at end of period 5.34% 5.31% 5.50%
</TABLE>
Subsidiary Activities
The Company has three wholly-owned subsidiaries: the Bank, incorporated
under the laws of the United States, Abstractors, Inc., and Northeast
Pennsylvania Trust Co. incorporated under Pennsylvania law. FIDACO, Inc. is an
inactive subsidiary of First Federal Bank with the only major asset being an
investment by FIDACO, Inc. in Hazleton Community Development Corporation.
Abstractors, Inc. is a title insurance agency with total assets of $547,000 at
September 30, l999. Northeast Pennsylvania Trust Co., offers trust estate and
asset management services and products and has total assets of $938,000 at
September 30, 1999. At September 30,1999 total assets of FIDACO, Inc were
$30,000.
Personnel
As of September 30, 1999, the Company had 160 full-time and 24
authorized part-time employees, none of whom were covered by a collective
bargaining agreement. Management believes that the Company has good relations
with its employees and there are no pending or threatened labor disputes with
its employees.
Regulation and Supervision
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the Federal Deposit
Insurance Corporation (the "FDIC"), as the deposit insurer. The Bank is a member
of the Federal Home Loan Bank ("FHLB") System. The Bank's deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
Page 5
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regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Bank and their operations.
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
form 10-K do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company is qualified in its
entirety by reference to such statutes and regulations.
Page 6
<PAGE>
Federal Savings Institution and Regulations
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, non-residential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One-Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily
marketable collateral, which is defined to include certain financial instruments
and bullion. At September 30, 1999, the Bank's general limit on loans-to-one
borrower was $8.8 million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lending ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) in at
least 9 months out of each 12-month period. A savings association that fails the
QTL test must either convert to a bank charter or operate under certain
restrictions. As of September 30, 1999 the Bank maintained 71.15% of its
portfolio assets in qualified thrift investments and, therefore, met the QTL
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered as "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective through the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. A Tier I institution exceeded all capital
requirements before and after a proposed capital distribution and has not been
advised by the OTS that it needs more than normal supervision. A Tier I
institution could, after first giving notice to but without obtaining approval
of the OTS, make capital distributions during the calendar year equal to the
greater of 100% of its net earnings to date during the calendar year plus the
amount that would have reduced by one-half the excess capital over its capital
requirements at the beginning of the calendar year, or 75% of its net income for
the previous four quarters. Any additional capital distributions required prior
regulatory approval.
Effective April 1, 1999, the OTS' capital distribution regulation
changed. Under the new regulation, an application to and the prior approval of
the OTS is required before any capital distribution if the institution does not
meet the criteria for "expedited treatment" of applications under OTS
regulations (generally, compliance with all capital requirements and examination
ratings in one of two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still give advance notice to OTS of the capital
distribution. If the Bank's capital fell below its regulatory requirements or if
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution, which would otherwise be
permitted by regulation if the OTS determines that the distribution would be
unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank's average liquidity ratio for the year
ended September 30, 1999 was 8.67%, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. The assessments paid by the Bank for the year
ended September 30, 1999 totaled $102,000.
Branching. OTS regulations permit federally-chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by the federal savings
associations.
Page 7
<PAGE>
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth; asset quality; earnings; and compensation, fees and
benefits. Most recently, the agencies have adopted Guidelines concerning Year
2000 computer compliance. If the appropriate federal banking agency determines
that an institution fails to meet any standard prescribed by the Guidelines, the
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio for institutions receiving the highest
examination rates (4% for others) and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weighted assets, all assets, including certain off
balance sheet assets, are multiplied by risk-weight of 0% to 100%, as assigned
by the OTS capital regulation based on the risks OTS believes are inherent in
the type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage standard. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and, within specified limits, the allowance for
loan and lease losses. Overall, the amount of supplementary capital included as
part of total capital cannot exceed 100% of core capital.
The OTS has adopted an interest rate risk component into its regulatory
capital requirements; however, the OTS has postponed indefinitely any adjustment
to capital which would be required by such interest rate risk component. The OTS
interest rate risk rule as written would also adjust the risk-weighting for
certain mortgage derivative securities. Under the rule as written, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the Bank's assets, as calculated in
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<PAGE>
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total risk-based capital. The
interest rate risk component would be an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the Bank's assets. That dollar
amount would be deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule as written,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% would not be subject to the interest
rate risk component, unless the OTS determined otherwise. The rule also provides
that the Director of the OTS may waive or defer an association's interest rate
risk component on a case-by-case basis. No prediction can be made when such
interest rate risk component requirement will be implemented, or if it ever will
be implemented.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of capitalization. Generally, a
savings institution that has a total risk-based capital of less than 8% or a
leverage ratio or a Tier 1 capital ratio that is less than 4% is considered to
be undercapitalized. A savings institution that has a total risk-based capital
less than 6%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage
ratio that is less than 3% is considered to be "significantly undercapitalized"
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized." Subject to a
narrow exception, the Banking regulator is required to appoint a receiver or
conservator for an institution that is critically undercapitalized. The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an association receives notice that it is
"undercapitalized," significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions may become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators, restrictions
on growth, and capital distributions and limitations on expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions currently range from 0
basis points to 27 basis points. The FDIC is authorized to raise the assessment
rates in certain circumstances. The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of the
Bank. In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980's by the Financing Corporation
to recapitalize the predecessor to the Savings Association Insurance Fund.
During 1998, Financing Corporation payments for Savings Association Insurance
Fund members approximated 600 basis points, while Bank Insurance Fund members
paid 1.22 basis points. By law, there will be equal sharing of Financing
Corporation payments between the members of both insurance funds on the earlier
of January 1, 2000 or the date the two insurance funds are merged. The Bank's
assessment rate for the years ended September 30, 1999, 1998 and 1997 was .059%,
.058% and .064% of assessable deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in the FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
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<PAGE>
requirement with an investment in FHLB stock at September 30, l999, of $ 7.8
million. FHLB advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance. At September 30, 1999, the Bank had $156.0 million
in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended September 30, 1999, 1998 and 1997
dividends from the FHLB to the Bank amounted to approximately $411,000, $190,000
and $127,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLB's will not also cause a
decrease in the value of the FHLB stock held by the Bank.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$44.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $44.3 million, the
reserve requirement is $1.3 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB system members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. Upon any
non-supervisory acquisition by the Company of another savings association, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act, as amended (the "BHC Act"), subject to the prior approval of the
OTS, and to other activities authorized by OTS regulation. Legislation enacted
in 1999 imposes limitations upon the activities of unitary savings and loan
holding companies. Under the legislation, such holding companies are restricted
to activities permitted by a "financial holding company," including insurance
and investment banking, and activities permitted by multiple holding companies
as discussed above. General commercial activities are not permissible. Unitary
savings and loan holding companies in existence prior to May 1999, such as the
Company, are grandfathered. However, the grandfather would not apply to any
company that acquired the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than 5% of a non-subsidiary holding company or savings
association. The HOLA also prohibits a savings and loan holding company from
acquiring more than 5% of a company engaged in activities other than those
authorized for savings and loan holding companies by the HOLA; or acquiring or
retaining control of a depository institution that is not insured by the FDIC.
In evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
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<PAGE>
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a September 30
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company. Neither the Company nor the Bank has been audited by
the IRS in the past five years.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrifts") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, the provisions repealing the above thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996." The new rules eliminated the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also required that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank had previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years that began after December 31, 1995, the Bank's bad debt
deduction was equal to net charge-offs. The new rules allowed an institution to
suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years was equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996. For this purpose, only home purchase and home improvement loans
were included and the institution could have elected to have the tax years with
the highest and lowest lending activity removed from the average calculation. If
an institution was permitted to postpone the reserve recapture, it had to begin
its six year recapture no later than the 1998 tax year. The unrecaptured base
year reserves were not subject to recapture as long as the institution continued
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continued to be subject to a provision of present law referred
to below that required recapture in the case of certain excess distributions to
shareholders.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock, and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
considered to result in a distribution from the Bank's bad debt reserve. Thus,
any dividends to the Company that would reduce amounts appropriated to the
Bank's bad debt reserve and deducted for federal income tax purposes would
create a tax liability for the Bank. The amount of additional taxable income
created from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus if
the Bank makes a "non-dividend distribution," then approximately one and
one-half times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 34% corporate income tax rate (exclusive
of state and local taxes). The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
bad debt reserve deduction claimed by the Bank over the deduction that would
have been allowable under the experience method is treated as a preference item
for purposes of computing the AMTI. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after June 30, 1986 and before January 1, 1996, an environmental tax
of 0.12% of the excess of AMTI (with certain modifications) over $2.0 million is
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imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
State and Local Taxation
The Company and its non-thrift Pennsylvania subsidiaries are subject to
the Pennsylvania Corporation Net Income Tax and Capital Stock and Franchise Tax.
The Corporate Net Income Tax rate for fiscal 1999 is 11.99% and is imposed on
the Company's and its non-thrift subsidiaries' unconsolidated taxable income for
federal purposes with certain adjustments. In general, the Capital Stock Tax is
a property tax imposed at the rate of 1.275% of a corporation's capital stock
value, which is determined in accordance with a fixed formula. The Company is
also required to file an annual report with and pay an annual Franchise tax to
the State of Delaware.
The Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax
Act (the "MTIT"), as amended, to include thrift institutions having capital
stock. Pursuant to the MTIT, the Bank's tax rate is 11.5%. The MTIT exempts the
Bank from all other taxes imposed by the Commonwealth of Pennsylvania for state
income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT is
a tax upon net earnings, determined in accordance with generally accepted
accounting principals ("GAAP") with certain adjustments. The MTIT, in computing
GAAP income, allows for the deduction of interest earned on Pennsylvania and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Bank. Net operating losses, if any,
thereafter can be carried forward three years for MTIT purposes. Neither the
Company nor the Bank has been audited by the Commonwealth of Pennsylvania in
the last five years.
<TABLE>
Additional Item. Executive Officers of the Registrant
- ---------------- ------------------------------------
The following table sets forth information regarding the
executive officers of the Company and the Bank who are not directors.
Name Age as of 9/30/99 Position
- ---- ----------------- --------
<S> <C> <C>
Thomas C. Blass 54 Senior Vice President and Trust Officer
of the Trust Company since June 1999.
Trust Officer or financial institution in
Bloomsburg, PA prior to current position.
Bernard M. Miskin 48 Senior Vice President, Operations
Division of the Bank since 1995.
Joseph K. Osiecki 61 Senior Vice President, Corporate Retail
Division since 1999, Loan Division since
1993.
Patrick J. Owens, Jr. 56 Senior Vice President, Chief Financial
Officer of the Bank since 1993 and
Treasurer of the Company since 1998.
</TABLE>
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<PAGE>
Item 2. Properties
The Company currently conducts its business through 13 full service
banking offices located in Luzerne, Carbon, Columbia, Montour and
Schuylkill counties, and one loan origination office in Monroe County
in Northeast Pennsylvania. Abstractors, Inc. and Northeast
Pennsylvania Trust Co. conduct their business from the downtown
Hazleton area. The following table sets forth the Company's offices as
of September 30, 1999.
<TABLE>
Net Book Value
of Property or
Leasehold
Original Year Improvements Total Deposits
Leased or Leased or Date of Lease at September at September
Location Owned Acquired Expiration 30, 1999 30, 1999
- -------- ----- -------- ---------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Administrative/Home
Office:
12 E. Broad Street
Hazleton, PA 18201 Owned 1947 - $3,263 $100,184
2 E. Broad Street
Hazleton, PA 18201 Leased 1992 month-to-month - -
Branch Offices:
Bloomsburg Office:
17 E. Main Street
Bloomsburg, PA 17815 Owned 1963 - 455 26,116
Shenandoah Office:
5-7 E. Main Street
Shenandoah, PA 17976 Owned 1968 - 412 48,760
Pottsville Office:
111 E. Norweigan Street
Pottsville, PA 17901 Owned 1968 - 601 28,738
Lehighton Office:
111 N. First Street
Lehighton, PA 18235 Owned 1977 - 127 30,621
Laurel Mall Office:
240 Laurel Mall
Hazleton, PA 18201 Leased 1994 2003 214 59,958
Schuylkill Mall Office:
611 Schuylkill Mall
Frackville, PA 17976 Leased 1978 2001 36 22,737
Gould's IGA Office:
Route 93
Sugarloaf, PA 18249 Leased 1995 2000 30 11,937
Mountaintop Office:
360 S. Mountain Boulevard
Mountaintop, PA 18707 Owned 1997 - 823 14,984
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<PAGE>
Scott Township Office:
PO Box 518
2691 New Berwick Highway
Bloomsburg, PA 17815 Owned 1998 - 1,037 15,547
Freeland Branch:
402 Front Street
Freeland, PA 18224 Leased 1999 2003 54 61
Back Mountain Branch:
154 N. Memorial Highway
Shavertown, PA 18708 Leased 1999 2000 30 484
Danville Branch:
1519 Bloom Road
Danville, PA 17821 Owned 1999 - 654 15,856
Loan Production
Origination Office:
Pocono L.P.O. Office
P.O. Box 1092
Pocono Pines, PA 18350 Leased 1997 month-to-month - -
Title Insurance Agency:
Abstractors, Inc.
101 S. Church Street
Hazleton, PA 18201 Leased 1998 2001 19 N/A
Trust Company:
Northeast Pennsylvania Trust Co.
Hazleton Center
2 E. Broad Street
Hazleton, PA 18201 Leased 1999 2004 26 N/A
</TABLE>
Item 3.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 believe by
management to be immaterial to the Company's financial condition or
results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Information relating to the market for Registrant's common equity and
related shareholder matters appears under "Market for Registrant's Common Equity
and Related Shareholder Matters" in the Registrant's l999 Annual Report to
Shareholders on page 22 and is incorporated herein by reference. Information
relating to dividend restrictions for Registrant's common stock appears under
"Regulation and Supervision."
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 1999 Annual Report
to Shareholders on page 8 and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the
Registrant's l999 Annual Report to Shareholders on pages 9 through 22 and is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
The above-captioned information appears under the heading "Management
of Interest Rate Risk and Market Risk Analysis" in the Registrant's 1999 Annual
Report to Shareholders on pages 9 through 11 and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Northeast Pennsylvania
Financial Corp. and its subsidiaries, together with the report thereon by KPMG
LLP appears in the Registrant's 1999 Annual Report to Shareholders on pages 23
through 46 and are incorporated herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable.
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<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 26, 2000
at pages 5 and 6.
Item 11. Executive Compensation
The information relating to executive compensation is incorporated
herein by reference to the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held on January 26, 2000 at pages 8 through 16.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on January 26,
2000 at pages 3 and 4.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on January 26, 2000
at page 17.
Page 16
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report
(1)Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1999 Annual Report to
Shareholders:
Consolidated Statements of Financial Condition
as of September 30, 1999 and 1998..............................23
Consolidated Statements of Operations
For the Years Ended September 30, 1999, 1998 and 1997..........24
Consolidated Statements of Comprehensive Income
For the Years Ended September 30, 1999, 1998, and
1997.............................................................25
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 1999, 1998 and 1997..........26
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1999, 1998 and 1997.......27-28
Notes to Consolidated Financial Statements....................29-43
Independent Auditor's Report........................,............46
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
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 Employment Agreement between Northeast Pennsylvania Financial Corp.
and E. Lee Beard**
10.2 Employment Agreement between Northeast Pennsylvania Financial Corp.
and Thomas L. Kennedy**
10.3 Employment Agreement between First Federal Bank and E. Lee Beard**
10.4 Employment Agreement between First Federal Bank and Thomas L.
Kennedy**
10.5 Change in Control Agreement between Northeast Pennsylvania
Financial Corp. and Patrick J. Owens, Jr.**
10.6 Change in Control Agreement between First Federal Bank and Patrick
J. Owens, Jr.**
10.7 Change in Control Agreement between First Federal Bank and Bernard
M. Miskin**
10.8 Change in Control Agreement between First Federal Bank and Joseph
K. Osiecki**
10.9 Form of First Federal Bank Supplemental Executive Retirement Plan*
10.10 Form of First Federal Bank Employee Severance Compensation Plan*
10.11 Form of First Federal Bank Management Supplemental Executive
Retirement Plan*
10.12 Northeast Pennsylvania Financial Corp. 1998 Stock-Based Incentive
Plan***
11.0 Statement regarding Computation of Per Share Earnings (See Notes to
Consolidated Financial Statements)
13.0 1999 Annual Report to Shareholders
Page 17
<PAGE>
21.0 Subsidiary information is incorporated by reference to "Part I -
Subsidiaries"
23.0 Consent of KPMG LLP
27.0 Financial Data Schedule
* Incorporated herein by reference into this document from the Exhibits
to the Form S- 1 Registration Statement, and any amendments thereto,
Registration No. 333-43281
** Incorporated herein by reference into this document the Exhibits to the
Company's Form 10-K for the year ended September 30, 1998.
*** 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
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
Page 18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ _______________________________ December 28, 1999
E. Lee Beard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ E. Lee Beard December 28, 1999
- -------------------------------
E. Lee Beard
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Paul Conard December 28, 1999
- -------------------------------
Paul Conard
Director
/s/ Dr. William R. Davidson December 28, 1999
- -------------------------------
Dr. William R. Davidson
Director
/s/ Barbara Ecker December 28, 1999
- -------------------------------
Barbara Ecker
Director
/s/ R. Peter Haentjens, Jr. December 28, 1999
- -------------------------------
R. Peter Haentjens, Jr.
Director
/s/ Atty. Thomas L. Kennedy December 28, 1999
- -------------------------------
Atty. Thomas L. Kennedy
Chairman of the Board
/s/ Honorable John P. Lavelle December 28, 1999
- -------------------------------
Honorable John P. Lavelle
Director
/s/ Michael J. Leib December 28, 1999
- -------------------------------
Michael J. Leib
Director
/s/ William J. Spear December 28, 1999
- -------------------------------
William J. Spear
Director
/s/ Patrick J. Owens, Jr. December 28, 1999
- -------------------------------
Patrick J. Owens, Jr.
Treasurer
(Principal Accounting and Financial Officer)
Page 19
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set
forth below is derived in part from, and should be read in conjunction
with, the Consolidated Financial Statements of the Company and Notes
thereto presented elsewhere in this Annual Report.
<TABLE>
At September 30,
----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED FINANCIAL DATA:
Total Assets $612,225 $522,268 $369,242 $362,464 $318,931
Cash and cash equivalents 4,177 3,053 13,214 4,045 3,681
Loans, net (1) 364,190 282,706 261,469 242,916 213,515
Securities held-to-maturity:
Mortgage-related securities, net - - 9,965 13,386 51,868
Investment securities, net 30,332 31,770 28,960 30,100 26,355
Securities available for sale:
Mortgage-related securities, net 56,333 75,651 29,982 37,259 497
Investment securities, net 133,502 113,443 14,791 22,899 12,826
Deposits 375,983 324,005 314,123 306,806 280,010
FHLB Advances 155,980 106,498 23,516 25,534 11,050
Total equity 75,476 87,434 28,538 26,127 25,550
Assets acquired through foreclosure 98 112 319 453 423
Non-performing assets and
troubled debt restructurings 1,469 1,351 1,205 1,169 1,670
For the Fiscal Years Ended September 30,
---------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
SELECTED OPERATING DATA:
Total interest income $37,674 $30,542 $26,599 $24,323 $21,280
Interest expense 19,822 15,566 14,194 13,007 10,845
------ ------ ------- ------- -------
Net interest income 17,852 14,976 12,405 11,316 10,435
Provision for loan losses 747 1,059 651 97 25
--- ----- --- -- --
Net interest income after provision
for loan losses 17,105 13,917 11,754 11,219 10,410
Non-interest income:
Net gain (loss) on sale of securities 63 62 (563) - (6)
Other (2) 1,805 894 430 508 605
Non-interest expense 13,395 15,279 9,492 10,774 (3) 8,360
------ ------ ----- ------ -----
Income(loss) before income taxes 5,578 (406) 2,129 953 2,649
Income taxes 1,013 (359) 748 12 899
----- ----- --- -- ---
Net income(loss) $4,565 ($47) $ 1,381 $ 941 $1,750
====== ===== ======= ===== ======
</TABLE>
(See footnotes on next page)
<TABLE>
At or for the Fiscal Years Ended September 30,
----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA (4):
Performance Ratios:
Average yield on interest-earning assets (5) 7.34% 7.45% 7.51% 7.48% 7.38%
Average rate paid on interest-bearing
liabilities 4.36 4.35 4.31 4.29 3.98
Average interest rate spread (6) 2.98 3.10 3.20 3.19 3.40
Net interest margin (7) 3.65 3.74 3.53 3.49 3.60
Ratio of interest-earning assets to
interest-bearing liabilities 118.00 117.35 108.31 107.57 108.43
Net-interest income after provision for loan
losses to non-interest expense 127.70 91.09 123.83 104.13 124.52
Non-interest expense as a percent of
average assets 2.42 3.53 2.58 3.19 2.78
Return on average assets .83 (.01) 0.38 0.28 0.58
Return on average equity 5.78 (.08) 4.98 3.60 7.06
Ratio of average equity to average assets 14.72 13.40 7.53 7.75 8.25
<FN>
(1) Loans, net, represents gross loans receivable net of the allowance for
loan losses, loans in process and deferred loan origination fees. The
allowance for loan losses at September 30, 1999, 1998, 1997, 1996 and
1995 was $2.9 million, $2.3 million, $1.3 million, $730,000 and
$724,000, respectively.
(2) Includes $176,000 net loss for disposition of branch equipment in
connection with a branch relocation in fiscal 1998.
(3) Includes a one-time special assessment of $1.7 million in order to
recapitalize the Savings Association Insurance Fund (SAIF) in fiscal
1996.
(4) Asset Quality Ratios are end of period ratios. With the exception of end
of period ratios, all ratios are based on average daily balances during
the indicated periods.
(5) Calculations of yield for 1999, 1998, 1997 and 1996 are presented on a
taxable equivalent basis using the combined Federal and state income tax
rate of 40%. The Company did not have securities exempt from Federal or
state income taxes in previous years.
(6) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets.
</FN>
</TABLE>
Page 8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTRODUCTION AND BUSINESS
The following discussion and analysis is presented on a consolidated basis and
focuses on the major components of Northeast Pennsylvania Financial Corp.(the
"Company") operations and significant changes in the results of operations for
the periods presented. The discussion should be read in conjunction with the
Company's consolidated financial statements and accompanying notes thereto
presented elsewhere in this Annual Report.
The Company is a business corporation formed at the direction of First Federal
Bank (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"). Established in connection with the
Conversion, the Foundation is dedicated to the communities served by the Bank.
The Company became the holding company for First Federal Bank (the "Bank"), a
federally chartered capital stock savings bank regulated by the Office of Thrift
Supervision ("OTS"), upon the Bank's conversion to stock form on March 31, 1998.
The Company'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
Company's provision for loan losses, loan and security sales activities, service
charges and other fee income, and non-interest expense. The Company's
non-interest expense principally consists of compensation and employee benefits,
office occupancy and equipment expense, federal deposit insurance premiums, data
processing, and advertising and business promotion expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
The Company serves Northeastern and Central Pennsylvania through 13 office
locations in the greater Hazleton Area, Mountaintop, Bloomsburg, Danville,
Lehighton, and all of Schuylkill County. The Company 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. In addition to the Bank, the Company's other
subsidiaries consist of Abstractors, Inc., which is a title insurance agency,
and Northeast Pennsylvania Trust Co., which offers trust, estate , and asset
management services and products. FIDACO, Inc. is an inactive subsidiary of
First Federal Bank.
Forward Looking Statements
In addition to historical information, our Annual Report 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 regulation 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 Company'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.
Management Strategy
The Company's operating strategy is that of a community-based bank, offering a
wide variety of deposit 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 Company's operating strategy
has focused on: (i) maintaining strong asset quality by originating one- to
four-family loans located in its market area; (ii) increasing profitability by
emphasizing higher yielding consumer and commercial loans; (iii) managing its
interest rate risk by emphasizing shorter-term, fixed-rate, one- to four-family
loans, in addition to consumer and commercial loans; limiting its retention of
newly originated longer-term fixed-rate one- to four-family loans; soliciting
longer-term deposits; utilizing longer-term advances from the 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 Company has attempted to diversify and expand its loan products to better
serve its customer base by placing a greater emphasis on its consumer lending
and commercial lending, primarily to small businesses and municipalities. 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 originations during a
fiscal year, periodically the Company has had to limit its originations of such
loans. Additionally, the Company has implemented a program to sell in the
secondary market longer-term, fixed-rate one- to four-family loans which it
could originate in excess of its retention policy for such loans. The Company
began offering loan products which it has historically not offered, such as
nonconforming or subprime one- to four-family loans. The loan products are
currently being held in the Bank's portfolio, however they have been originated
to be saleable in the secondary market.
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
changes in
Page 9
<PAGE>
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 to maturity of not more than fifteen years,
adjustable-rate and shorter-term loans, commercial loans and consumer loans;
(ii) limiting the retention for portfolio of all greater than 15 year fixed-rate
mortgage loans to no more than 25% of the total originations in a given year;
and (iii) selling, in the secondary market, the excess of origination of
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. During 1999, the Bank continued to originate in excess of
the 25% limitation, however it has commenced selling any excess of greater than
15-year fixed rate mortgages in the secondary market.
Management believes that reducing its exposure to interest rate fluctuations
will enhance long-term profitability. However, the Bank's strategies may
adversely impact net interest income due to lower initial yields on some of
these investments in comparison to longer-term fixed-rate investments and whole
loans. To promote a higher yield on its investment securities, while at the same
time addressing the Bank's interest rate risk management policies, the Bank has
invested a significant portion of its portfolio of investment securities in
longer-term (more than five years) federal agency obligations which have call
features. Given the rates of such securities in comparison to current market
interest rates, the Bank anticipates the substantial majority of such securities
will be called prior to their contractual maturity. However, if changes in
interest rates exceed ranges anticipated by the Bank in estimating the
anticipated life of such callable securities, the Bank would be subject to
increased interest rate or reinvestment risk, depending on the direction of the
change in market interest rates.
Net Portfolio Value. The Company's interest rate sensitivity is
primarily monitored by management through the use of a model which internally
generates estimates of the change in the Company's net portfolio value ("NPV")
over a range of interest rate scenarios. Such analysis was prepared by a third
party for the Company. 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 Company's
internal model primarily due to differences in assumptions utilized.
The following table sets forth the Company's NPV as of September 30, 1999.
<TABLE>
NPV as % of Portfolio
Net Portfolio Value Value of Assets
------------------- ----------------
Change in
Interest Rates
In Basis Points NPV
(Rate Shock) Amount $ Change % Change Ratio Change (1)
- ------------ ------ -------- -------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
300 62,122 (22,434) (26.53%) 10.98% (277)
200 70,914 (13,642) (16.13) 12.16 (158)
100 78,651 (5,905) (6.98) 13.11 (63)
Static 84,556 0 0.00 13.74 0
(100) 86,286 1,730 2.05 13.75 1
(200) 83,975 (581) (0.69) 13.20 (54)
(300) 79,079 (5,477) (6.48) 12.29 (145)
<FN>
(1) Expressed in basis points.
</FN>
</TABLE>
Certain shortcomings are inherent in the methodology used in the NPV
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Company's interest
sensitive assets and liabilities existing at the beginning of a period remain
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
Company'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 Company's net interest income
and will differ from actual results.
Page 10
<PAGE>
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 the Company'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 that
same time period. At September 30, 1999, the Company's cumulative interest rate
gap (which is the difference between the amount of interest-earning assets
maturing or repricing within one year and interest-bearing liabilities maturing
or repricing within one year) as a percentage of total assets, was a negative
7.2%. 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 positive gap position
would tend to have its interest-earning assets repricing upward at a faster rate
than its interest-bearing liabilities which, consequently, may tend to
positively affect the growth of its net interest income. 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 which, consequently, may tend to positively
affect the growth of its net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1999, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
September 30, 1999, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a series of time intervals.
Prepayment and decay rates can have a significant impact on the Company's
estimated gap. While the Company believes such assumptions to be reasonable,
there can be no assurance that assumed prepayment rates and decay rates will
approximate actual loan prepayment and deposit/withdrawal activity.
<TABLE>
At September 30, 1999
(In Thousands)
Over three Over six After one year
Zero to months to months to but within After five
three months six months one year five years years Total
------------ ---------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits $2,081 $- $- $- $- $2,081
Investment securities 969 0 2,502 11,877 136,949 152,297
Mortgage-related securities 8,630 5,279 7,954 20,466 14,004 56,333
Equity securities 11,537 - - - - 11,537
(FHLB, FHLMC & others) 70,484 41,923 63,582 130,505 60,609 367,103
------ ------ ------ ------- ------ -------
Loans (1) $93,701 $47,202 $74,038 $162,848 $211,562 $589,351
======= ======= ======= ======== ======== ========
Total interest-earning assets
INTEREST-BEARING LIABILITIES:
Money market accounts $6,827 $4,621 $5,246 $4,429 $9 $21,132
Savings accounts 3,171 3,026 5,646 30,381 27,443 69,667
NOW accounts 3,855 3,435 5,786 18,756 3,507 35,339
Certificate accounts 77,171 36,137 72,273 51,409 - 236,990
FHLB advances 24,500 2,364 4,727 18,909 105,480 155,980
Other borrowings 524 - - - - 524
--- -- -- -- -- ---
Total interest-bearing $116,048 $49,583 $93,678 $123,884 $136,439 $519,632
======== ======= ======= ======== ======== ========
liabilities
Interest-earning assets less interest-
bearing liabilities ($22,347) ($2,381) ($19,640) $38,964 $75,123 $69,719
Cumulative interest-rate
sensitivity gap ($22,347) ($24,728) ($44,368) ($5,404) $69,719
Cumulative interest rate gap
as a percentage of total assets (3.7%) (4.0%) (7.2%) (0.9%) 11.4%
<FN>
(1) Gross loans excluding non-accrual loans
</FN>
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Page 11
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income also
depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
Average Balance Sheet. The following table sets forth certain
information relating to the Company for the fiscal years ended September 30,
1999, 1998 and 1997. The average yields and costs are derived by dividing income
or expense by the average balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods shown, except where noted, otherwise
and reflect annualized yields and costs. Average balances are derived from
average daily balances. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
For the Fiscal Years Ended September 30,
----------------------------------------
1999 1998 1997
---- ---- ----
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1):
Real estate:
Taxable $201,162 $15,463 7.69% $190,264 $14,765 7.76% $183,902 $14,250 7.75%
Non-taxable(2) 258 24 9.30 186 19 10.22 - - -
Commercial:
Taxable 10,263 892 8.69 6,634 632 9.53 8,739 785 8.98
Non-taxable(2) 4,665 342 7.33 4,231 335 7.92 1,143 84 7.35
Consumer 97,014 8,079 8.33 70,423 6,018 8.55 58,717 4,980 8.48
------ ----- ---- ------ ----- ---- ------ ------ ----
Total loans 313,362 24,800 7.91 271,738 21,769 8.01 252,501 20,099 7.96
Mortgage-related securities (3) 68,359 4,190 6.13 54,928 3,362 6.12 54,112 3,306 6.11
Investment securities (4):
Taxable 85,901 5,537 6.45 59,568 3,888 6.53 42,788 2,866 6.70
Non-taxable (2) 65,472 4,740 7.24 24,179 1,772 7.33 5,401 408 7.55
Interest-earning deposits 2,929 94 3.21 9,121 457 5.01 1,499 82 5.47
----- -- ---- ----- --- ----- ----- -- ----
Total interest-earning assets 536,023 39,361 7.34 419,534 31,248 7.45 356,301 26,761 7.51
Noninterest-earning assets 16,608 12,234 11,740
------ ------ ------
Total assets $552,631 $431,768 $368,041
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Money market and NOW accounts $51,176 $999 1.95% $44,563 $ 789 1.77% $42,109 $813 1.93%
Savings accounts 69,546 1,464 2.11 71,102 1,607 2.26 72,292 1,765 2.44
Certificates of deposit 212,933 11,053 5.19 189,306 10,319 5.45 187,270 10,120 5.40
------- ------ ---- ------- ------ ----- ------- ------ ----
Total deposits 333,655 13,516 4.05 304,971 12,715 4.17 301,671 12,698 4.21
FHLB advances and other borrowings 120,600 6,306 5.23 52,531 2,851 5.43 27,294 1,496 5.48
------- ------ ---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities 454,255 19,822 4.36 357,502 15,566 4.35 328,965 14,194 4.31
Non-interest-bearing liabilities 17,022 16,423 11,363
------ ------ ------
Total liabilities 471,277 373,925 340,328
Equity 81,354 57,843 27,713
------ ------ ------
Total liabilities and equity $552,631 $431,768 $368,041
======== ======== ========
Net interest-earning assets $81,768 $62,032 $ 27,336
Net interest income/interest rate
spread (5) $19,539 2.98% $15,682 3.10% $12,567 3.20%
------- ----- ------- ----- -------- -----
Net interest margin as a percentage
of interest-earning assets (6) 3.65% 3.74% 3.53%
----- ----- -----
Ratio of interest-earning assets to
interest-bearing liabilities 118.00% 117.35% 108.31%
------- ------- -------
<FN>
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and includes non-performing loans.
(2) Interest and Yield/Rate are presented on a taxable equivalent basis using
the combined federal and state income tax marginal rate of 40% for 1999,
1998 and 1997.
(3) Includes mortgage-related securities available for sale and
held-to-maturity.
(4) Includes investment securities available for sale and held-to-maturity,
stock in the FHLB of Pittsburgh and FHLMC.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
Page 12
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
Year Ended September 30,
------------------------
1999 vs 1998 1998 vs 1997
------------ ------------
Increase Total Increase Increase Total Increase
(Decrease) due to (Decrease) (Decrease) due to (Decrease)
----------------- ---------- ----------------- ----------
(In Thousands)
Rate Volume Rate Volume
---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans (1):
Real Estate:
Taxable ($138) $836 $698 $21 $494 $515
Non Taxable (4) (2) 7 5 10 9 19
Commercial:
Taxable (50) 310 260 51 (204) (153)
Non Taxable (4) (18) 25 7 7 244 251
Consumer (149) 2,210 2,061 38 1,000 1,038
----- ----- ----- -- ----- -----
Total loans (357) 3,388 3,031 127 1,543 1,670
Mortgage-related securities (2) 4 823 827 6 50 56
Investment securities (3):
Taxable (46) 1,697 1,651 (71) 1,093 1,022
Non Taxable (4) (21) 2,989 2,968 (12) 1,376 1,364
Interest-earning deposits (126) (237) (363) (6) 381 375
----- ----- ----- --- --- ---
Total interest-earning assets (546) 8,660 8,114 44 4,443 4,487
----- ----- ----- -- ----- -----
INTEREST-BEARING LIABILITIES:
Deposits:
Money Market and NOW accounts 86 124 210 (81) 57 (24)
Savings accounts (108) (35) (143) (129) (29) (158)
Certificates of deposit (454) 1,188 734 88 111 199
FHLB advances and other borrowings (100) 3,555 3,455 (15) 1,370 1,355
----- ----- ----- ---- ----- -----
Total interest-bearing liabilities (576) 4,832 4,256 (137) 1,509 1,372
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income $30 $3,828 $3,858 $181 $2,934 $3,115
=== ====== ====== ==== ====== ======
<FN>
(1) Balances are net of deferred loan origination costs, undisbursed proceeds
of construction loans in process, and includes non-performing loans.
(2) Includes mortgage-related securities available for sale and held to
maturity.
(3) Includes investment securities available for sale and held to maturity,
stock in FHLB of Pittsburgh and FHLMC.
(4) Presented on taxable equivalent basis using the combined Federal and state
income tax marginal rate of 40%.
</FN>
</TABLE>
RESULTS OF OPERATIONS
General. Net income for fiscal 1999 increased $4.6 million, from a net
loss of $47,000 for fiscal 1998 to $4.6 million for fiscal 1999. This increase
is primarily due to a $2.9 million net increase in net interest income from
$15.0 million at September 30, 1998 to $17.9 million at September 30, 1999. This
increase is also attributable to a $1.9 million decrease in non-interest expense
primarily due to the one-time $4.8 million contribution made to the Foundation
in March 1998.
The Company experienced a net loss of $47,000 for fiscal 1998, as compared to
$1.4 million net income for fiscal 1997. The decrease is primarily attributable
to the $4.8 million non-recurring pre-tax ($3.1 million after-tax) expense
relating to a charitable contribution to fund the Foundation in connection with
the Conversion, which was offset by a $2.6 million increase in net interest
income. If the after-tax effect of the contribution were eliminated, the Company
would have had net income of $3.1 million for fiscal 1998.
Interest Income. Interest income increased $7.1 million, or 23.4%, to
$37.7 million for fiscal 1999 from $30.5 million for fiscal 1998. This increase
is primarily due to a $116.5 million, or 27.8%, 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 also attributable to a $4.1
million, or 46.1%, increase in interest income on securities from $8.9 million
for fiscal 1998 to $13.0 million for fiscal 1999, primarily due to an $81.1
million increase in the average balance of these securities.
Interest income on loans increased $3.0 million, or 14.0%, to $24.7 million for
fiscal 1999. Consumer loan interest income increased $2.1 million, due to a
$26.6 million increase in the average balance of these loans, as a result of the
purchase of home equity loans from another financial institution, as well as
increased marketing efforts and competitive pricing of these loans. Commercial
loan interest income increased $961,000, or 64.4% from $1.5 million at September
30, 1998 to $2.5 million at September 30, 1999.
Interest income increased $3.9 million, or 14.7%, to $30.5 million for fiscal
1998 from $26.6 million for fiscal 1997. This change was primarily due to
increases of $36.3 million and $19.2 million in the average balances of
investment securities and loans receivable, respectively. This increase was also
due to a 5 basis point increase in the average rate for loans receivable, offset
by 54 basis point decrease in the average yield on investment securities.
Page 13
<PAGE>
Interest Expense. Interest expense increased $4.3 million, or 27.3%, to
$19.8 million in fiscal 1999. The increase in interest expense was primarily the
result of a $68.1 million increase in the average balance of FHLB advances and
other borrowings. This increase reflects management's decision to more heavily
utilize FHLB advances to fund asset growth.
Interest expense increased $1.4 million, or 9.9%, to $15.6 million for fiscal
1998. This change in interest expense was primarily the result of a $25.3
million increase in the average balance of FHLB advances and other borrowings,
offset by a decrease of 5 basis points in the average rate of these borrowings.
Provision for Loan Losses. The Company's provision for loan losses for
fiscal 1999 was $747,000, or .80% of total loans compared to $1.1 million, or
.80% of total loans for fiscal 1998. At the end of fiscal 1997, the provision
was $651,000, or .48% of total loans. The 1997 to 1998 change in the provision
for loan losses reflected a change in the strategic direction of the Bank's loan
portfolio. The change in strategic direction included a change in the
composition of the Company's loan portfolio by increasing the levels of
consumer, multi-family, commercial and construction loans. Such loans generally
bear a greater degree of credit risk than the one- to four-family loans. This
effect was mitigated in the 1998 to 1999 change due to the continued strong
performance by the loan portfolio. The Company anticipates that, as a result of
its increasing emphasis on consumer, commercial, multi-family and commercial
real estate and construction lending, it may need to maintain an allowance for
loan losses at a higher level than it has maintained in previous periods to
offset any greater risk resulting from the shifting composition of its loan
portfolio.
Non-interest Income. The Company experienced a $912,000 increase in
non-interest income for fiscal 1999. This increase was due to a $232,000
increase in gain on sale of loans due to the sales of mortgage loans to various
government agencies. Other income increased $229,000 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 $228,000
increase in insurance premium income from closings performed by the Company's
title insurance subsidiary. Service charges and fee income increased $203,000
due to increased customer activity on various deposit and loan accounts.
In fiscal 1998, non-interest income was $956,000, as compared to a negative
$133,000 for the prior year. Contributing to this increase was a $155,000
increase in service charges and other fees primarily due to the implementation
of surcharges on ATM transactions, as well as service charges and fees generated
in connection with increased loan origination and deposit account activity. The
1997 negative balance was due primarily to losses incurred on the sale of
available-for-sale securities in connection with the Company's restructuring of
its securities portfolio in fiscal 1997, combined with a $176,000 write down of
fixed assets, in fiscal 1997, resulting from the Company's decision to relocate
its Columbia Mall office to an alternate site in Columbia County.
Non-interest Expense. Total non-interest expense decreased $1.9
million, or 12.3%, from $15.3 million to $13.4 million for the year ended
September 30, 1998 and September 30, 1999, respectively, due primarily to a
one-time $4.8 million expense relating to the funding of the Foundation in March
1998. This decrease was offset by an increase in salary and benefit expense of
$1.4 million, or 23.9%, primarily due to shares committed to be released under
the Employee Stock Ownership Plan ("ESOP"), stock award expense in connection
with the Stock-Based Incentive Plan and additional staff due to the addition of
three branches in fiscal 1999. Other non-interest expense increased $804,000, or
54.9%, 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 amortization of goodwill
associated with branch and subsidiary acquisitions of $155,000, franchise tax
expense associated with the corporation formed March 31, 1998, as well as
increases in general operating expenses. Professional fees increased $296,000
due to an increased amount of legal, audit and consulting fees associated with
public company reporting responsibilities. Data processing increased $209,000
due to depreciation expense related to the installation of new teller and
mainframe hardware and software.
Total non-interest expense increased $5.7 million for fiscal 1998 due primarily
to a one-time $4.8 million non-recurring expense relating to the funding of the
Foundation. Compensation and employee benefits expense increased $521,000
primarily due to ESOP accruals relating to shares to be released, and staff
additions relating to the opening of a new branch office in Mountaintop,
Pennsylvania in January 1998. Professional fees increased $144,000 due to
increased legal and accounting fees associated with being a public company. FHLB
service charges increased $123,000 due to increased customer activity resulting
from the increased promotion of various checking account products.
Income Taxes. The Company had income tax expense of $1.0 million for
the year ended September 30, 1999 compared to a benefit of $359,000 for the year
ended September 30, 1998, resulting in an effective tax rate of 18.2% for fiscal
1999. The primary reason that the 1999 effective tax rate for the year 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 year
ended September 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.
For fiscal 1998, the Company had an income tax benefit of $359,000, as compared
to an expense of $748,000, which reflects a 35.1% effective tax rate, for fiscal
1997. The provision (benefit) for income taxes includes federal and state income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax basis of assets and liabilities. The
decrease in income tax expense was attributable to a net operating loss relating
to the one-time charitable contribution to the Foundation, combined with a state
tax credit of $55,000, granted under the Neighborhood Assistance Act.
FINANCIAL CONDITION
Total assets increased $90.0 million from $522.2 million at September 30, 1998
to $612.2 million at September 30, 1999. The growth in assets was primarily due
to increases in loans receivable, other assets and cash.
Loans increased $81.5 million to $364.2 million at September 30, 1999. This was
primarily due to a $20.0 million increase in one- to four-family loans 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. Multi-family and commercial
real estate loans increased $19.6 million due to marketing efforts and
competitive pricing of such products. Home equity loans and lines of credit
increased $17.9 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. Commercial loans
increased $11.5 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. Consumer loans other then home equity loans and lines of
credit increased $12.8 million due to the purchase of $4.0 million in various
consumer loans from the branch purchase of Omega Bank, combined with increased
indirect auto loan originations.
Prepaid expenses and other assets increased $6.1 million to $9.0 million at
September 30, 1999. This change was primarily due to a $3.8 million increase in
the deferred income tax benefit resulting from a decline in unrealized gain/loss
on available-for-sale securities, combined with a $1.4 million increase in
intangible assets resulting from goodwill relating to the purchase of the new
Omega branch office. The goodwill and core deposit premium will be amortized
over a period of six and ten years, respectively.
Securities classified as "held to maturity" decreased $1.4 million, or 4.5%, to
$30.3 million at September 30, 1999, while available-for-sale securities
increased $741,000, from $189.1 million at September 30, 1998 to $189.8 million
at September 30, 1999. Total deposits increased
Page 14
<PAGE>
$52.0 million, or 16.0%, to $376.0 million at September 30, 1999. The increase
in deposits was primarily due to a $40.9 million increase in certificates of
deposit from $196.1 million at September 30, 1998 to $237.0 million at September
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 $5.7 million in money market
accounts and a $4.2 million increase in NOW accounts as a result of a more
active solicitation of such accounts along with the acquisition of $2.6 million
in various checking accounts from the branch purchase of Omega Bank.
FHLB advances increased $49.5 million from $106.5 million at September 30, 1998
to $156.0 million at September 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 $12.0 million to $75.5 million at September 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 $5.8 million decrease in
unrealized gain (loss) on securities. Also contributing to this decline was a
$3.3 million acquisition of stock for stock benefit plans. These decreases were
offset by operating results of $4.6 million for the year, combined with a $1.0
million cash dividend for the year, resulting in a net increase of $3.6 million
in retained earnings.
Investment Activities
The investment policy of the Company, as approved by the Board of Directors,
requires management to maintain adequate liquidity, to generate a favorable
return on investments without incurring undue interest rate and credit risk and
to complement the Company's lending activities. The Company primarily utilizes
investments in securities for liquidity management and as a method of deploying
excess funding not utilized for loan originations or purchases. Generally, the
Company's investment policy is more restrictive than the OTS regulations allow
and, accordingly, the Company has invested primarily in U.S. Government and
agency securities, which qualify as liquid assets under the OTS regulations,
federal funds and U.S. Government sponsored agency issued mortgage-backed
securities. As required by SFAS No. 115, the Company has established an
investment portfolio of securities that are categorized as held-to-maturity,
available-for-sale or held for trading. The Company does not currently maintain
a portfolio of securities categorized as held for trading. At September 30,
1999, the available-for-sale securities portfolio totaled $189.8 million, or
31.0% of assets, and the held-to-maturity portfolio totaled $30.3 million, or
5.0% of assets.
On July 1, 1998, the Bank transferred certain held-to-maturity securities to the
available-for-sale investment portfolio. The amortized cost of the securities
was approximately $56.2 million with an unrealized gain net of taxes of
approximately $597,000. This transfer was in accordance with a special
reassessment provision contained within Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities."
The following table sets forth certain information regarding the amortized cost
and fair value of the Company's securities at the dates indicated.
<TABLE>
At September 30,
---------------
1999 1998 1997
---- ---- ----
Amortized Fair Amortized Fair Amoritized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Dollars In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government
agencies $26,783 $25,155 $31,770 $32,072 $19,997 $19,953
Other securities 3,549 3,160 - - 8,963 9,105
----- ----- -- -- ----- -----
Total $30,332 $28,315 $31,770 $32,072 $28,960 $29,058
------- ------- ------- ------- ------- -------
Debt securities available for sale:
Obligations of U.S. Treasury and U.S.
government agencies $43,464 $41,888 $55,661 $56,260 $10,984 $11,045
Other securities 85,048 80,077 47,867 48,732 - -
------ ------ ------ ------ -- --
Total $128,512 $121,965 $103,528 $104,992 $10,984 $11,045
-------- -------- -------- -------- ------- -------
Equity securities available for sale:
FHLB stock $7,824 $7,824 $5,325 $5,325 $2,054 $2,054
FHLMC stock 329 2,860 697 3,126 47 1,692
Other equity securities 763 853 - - - -
--- --- -- -- -- --
Total equity securities available-for-
sale 8,916 11,537 6,022 8,451 2,101 3,746
----- ------ ----- ----- ----- -----
Total debt and equity securities $167,760 $161,817 $141,320 $145,515 $42,045 $43,849
======== ======== ======== ======== ======= =======
Mortgage-related securties:
Mortgage-related securities held-to-
maturity:
FHLMC - - - - $5,772 $5,678
FNMA - - - - 3,948 3,891
GNMA - - - - - -
Collateralized mortgage obligations - - - - 245 242
-- -- -- -- --- ---
Total mortgage-related securities
held-to-maturity - - - - $9,965 $9,811
-- -- -- -- ------ ------
Mortgage-related securities available-for- sale:
FHLMC $8,633 $8,533 $10,798 $10,933 $5,690 $5,769
FNMA 13,311 13,068 14,337 14,604 2,168 2,188
GNMA 9,840 9,945 21,968 22,211 18,253 18,600
Collateralized mortgage obligations 24,250 23,745 24,708 24,861 3,380 3,425
Other securities 1,052 1,042 3,042 3,042 - -
----- ----- ----- ----- -- --
Total mortgae-related securities
available-for-sale 57,086 56,333 74,853 75,651 29,491 29,982
------ ------ ------ ------ ------ ------
Total mortgage-related securities 57,086 56,333 74,853 75,651 39,456 39,793
====== ====== ====== ====== ====== ======
Total securities $224,846 $218,150 $216,173 $221,166 $81,501 $83,642
======== ======== ======== ======== ======= =======
</TABLE>
Page 15
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
securities and mortgage-related securities as of September 30, 1999.
<TABLE>
Maturing Maturing after Maturing after Maturing
within one one year but 5 years but after 10
year within 5 years within 10 years years Total
---- -------------- --------------- ----- -----
<S> <C> <C> <C> <C> <C>
Available-for-sale securities:
Municipal securities $- $709 $13,254 $54,820 $68,783
Obligations of U.S. Government agencies - 3,500 38,465 1,499 43,464
Mortgage-related securities 1,052 - 7,690 48,344 57,086
Equity securities 8,916 - - - 8,916
Trust Preferred securities - - - 13,749 13,749
Corporate Bonds - 2,516 - - 2,516
-- ------ -- -- --------
Total securities at amortized cost $9,968 $6,725 $59,409 $118,412 $194,514
====== ====== ======= ======== ========
Total securities at fair value $12,580 $6,732 $57,740 $112,783 $189,835
======= ====== ======= ======== ========
Weighted Average Yield 6.12% 6.20% 6.06% 5.93% 5.68%
Held-to-maturity securities:
Municipal securities $- $- $- $3,549 $3,549
Obligations of U.S. Government agencies - - - 26,783 26,783
-- -- -- ------- -------
Total securities at amortized cost $- $- $- $30,332 $30,332
Total securities at fair value $- $- $- $28,315 $28,315
Weighted Average Yield - - - 6.40% 6.40%
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Weighted average yields are based on amortized cost
including municipal securities which are not reported on a tax-equivalent basis.
Loans
Net loans increased $81.5 million from fiscal 1998. The largest increase was in
one-to-four-family loans which increased $20.0 million to $196.9 million at
September 30, 1999 due to the acquisition of 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.
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
At September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Estate Loans:
One- to four-family $196,885 53.43% $176,924 61.74% $179,101 67.78% $170,773 69.68% $157,360 73.01%
Multi family and
commercial 31,497 8.55 11,938 4.17 6,701 2.54 4,429 1.81 3,457 1.60
Construction 3,983 1.08 3,759 1.31 5,818 2.20 5,129 2.09 4,040 1.88
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total real estate
loans $232,365 63.06 $192,621 67.22 $191,620 72.52 $180,331 73.58 $164,857 76.49
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Home equity loans
and lines of credit $70,118 19.03 $52,244 18.23 $41,278 15.62 $38,054 15.53 $33,275 15.44
Automobile 34,619 9.40 24,589 8.58 13,678 5.18 10,594 4.32 6,705 3.11
Education 2,796 0.76 2,351 0.82 2,348 0.89 2,538 1.04 2,432 1.13
Unsecured lines of
credit 1,744 0.47 1,589 0.55 1,310 0.49 959 0.39 495 0.23
Other 5,571 1.51 3,423 1.20 3,229 1.22 3,309 1.35 3,241 1.50
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total consumer
loans $114,848 31.17 $84,196 29.38 $61,843 23.40 $55,454 22.63 $46,148 21.41
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial loans $21,262 5.77 $9,742 3.40 $10,775 4.08 $9,280 3.79 $4,523 2.10
------- ---- ------ ---- ------- ----- ------ ---- ------ ----
Total loans $368,475 100.00% $286,559 100.00% $264,238 100.00% $245,065 100.00% $215,528 100.00%
======= ======= ======= ======= =======
Less:
Deferred loan
origination fees
and discounts $1,361 $1,580 $1,497 $1,419 $1,289
Allowance for
loan losses 2,924 2,273 1,272 730 724
----- ----- ----- --- ---
Total loans, net $364,190 $282,706 $261,469 $242,916 $213,515
======== ======== ======== ======== ========
</TABLE>
Page 16
<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Company's total loans at September 30, 1999. The table
does not include the effect of future principal prepayments.
<TABLE>
At September 30, 1999
---------------------
(In Thousands)
Multi-
One-to Family and
Four- Commercial Total
Family Real Estate Construction(1) Consumer Commercial Loans
------ ----------- --------------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Amount due in:
One year or less $9,480 $1,482 $- $20,756 $8,096 $39,814
After one year:
More than one year to five years 35,889 4,502 - 45,686 3,755 89,832
More than five years 151,516 25,513 3,983 48,406 9,411 238,829
------- ------ ----- ------ ----- -------
Total amount due $196,885 $31,497 $3,983 $114,848 $21,262 $368,475
======== ======= ====== ======== ======= ========
<FN>
(1) Construction loans, which consist of loans to the owner for the
construction of one- to four-family residences, automatically
convert to permanent financing upon completion of the construction
phase.
</FN>
</TABLE>
The following table sets forth, at September 30, 1999, the dollar amount of
loans contractually due after September 30, 2000, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
Due After September 30, 2000
----------------------------
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $93,795 $93,610 $187,405
Multi-family and commercial
real estate 18,499 11,516 30,015
Construction 3,844 139 3,983
----- --- -----
Total real estate loans 116,138 105,265 221,403
Consumer loans 85,150 8,942 94,092
Commercial loans 7,088 6,078 13,166
----- ----- ------
Total loans $208,376 $120,285 $328,661
======== ======== ========
</TABLE>
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-accrual loans and (REO). At September 30, 1999,
non-accrual loans totaled $1.4 million consisting of 61 loans, and REO totaled
$19,000 consisting of one, one- to four-family loan. It is the policy of the
Company to cease accruing interest on loans 90 days or more past due (unless the
loan principal and interest are determined by management to be fully secured and
in the process of collection) and to charge off all accrued interest. For the
year ended September 30, 1999, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $70,000. At September 30,
1999, the Company had a $1.8 million recorded investment in impaired loans, all
of which had specific allowances totaling $558,000. At September 30, 1998, there
was $1.4 million of impaired loans, all of which had specific loan loss
allowances totaling $488,000.
<TABLE>
At September 30,
----------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family real estate $848 $ 509 $622 $562 $879
Consumer 261 254 152 154 354
Commercial 262 476 - - 1
--- --- -- -- --
Total(1) $1,371 1,239 774 716 1,234
Real estate owned (REO)(2) 19 63 319 453 423
Other repossessed assets(2) 79 49 - - 13
-- -- -- -- --
Total non-performing assets(3) $1,469 $1,351 $1,093 $1,169 $1,670
====== ====== ====== ====== ======
Troubled debt restructurings - - $112 - -
Troubled debt restructurings and
total non-performing assets $1,469 $1,351 $1,205 $1,169 $1,670
====== ====== ====== ====== ======
Total non-performing loans and
troubled debt restructurings as
a percentage of total loans 0.38% 0.43% 0.34% 0.29% 0.58%
Total non-performing assets and
troubled debt restructurings as a
percentage of total assets 0.24% 0.26% 0.33% 0.38% 0.52%
<FN>
(1) Total non-accruing loans equal total non-performing loans.
(2) Real estate owned balances and other repossessed assets are shown net of
related loss allowances.
(3) Non-performing assets consist of non-performing loans (and impaired loans),
other repossessed assets and REO.
</FN>
</TABLE>
Page 17
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the risks
inherent in its loan portfolio and the general economy. The allowance for loan
losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to make
additional provisions for estimated loan losses based upon their judgments about
information available to them at the time of their examination. As of September
30, 1999, the Company's allowance for loan losses was .80% of total loans
compared to .80% as of September 30, 1998. The Company's method of calculation
reflects the emphasis in the Company's loan portfolio towards consumer,
multi-family and commercial, real estate, commercial and construction loans,
which involve inherently greater risks than traditional one- to four-family
mortgage loans. The Company will continue to monitor and modify its allowances
for loan losses as conditions dictate. While management believes the Company's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Company or that future adjustments to the allowance for
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses. In light of the
increased lending focus of the Company on loans involving greater risk than one-
to four-family mortgage loans, and the anticipated future growth in such loans
as a percentage of the Company's total loan portfolio, the Company anticipates
that its allowance for loan losses as a percentage of total loans will increase
in future periods.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
At or for the Fiscal Years Ended September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses,
beginning of year $2,273 $1,272 $730 $724 $769
Charged-off loans:
One- to four-family real estate 10 19 66 34 25
Consumer 91 57 66 60 70
-- -- -- -- --
Total charged-off loans 101 76 132 94 95
--- -- --- -- --
Recoveries on loans previously
charged off:
One- to four-family real estate - - - - 10
Consumer 5 18 23 3 15
-- -- -- -- --
Total recoveries 5 18 23 3 25
-- -- -- -- --
Net loans charged-off 96 58 109 91 70
Provision for loan losses 747 1,059 651 97 25
--- ----- --- -- --
Allowance for loan losses,
end of period $2,924 $2,273 $1,272 $730 $724
====== ====== ====== ==== ====
Net loans charged-off to average
interest-earning loans 0.03% 0.02% 0.04% 0.04% 0.03%
----- ----- ----- ----- -----
Allowance for loan losses
to total loans 0.80% 0.80% 0.48% 0.30% 0.33%
----- ----- ----- ----- -----
Allowance for loan losses to
non-performing loans and troubled
debt restructuring 213.12% 183.45% 143.57% 101.96% 58.67%
------- ------- ------- ------- ------
Net loans charged-off to allowance
for loan losses 3.28% 2.55% 8.57% 12.47% 9.67%
----- ----- ----- ------ -----
Recoveries to charge-offs 4.95% 23.68% 17.42% 3.19% 26.32%
----- ------ ------ ----- ------
</TABLE>
Page 18
<PAGE>
The following table sets forth the Company's allowance for loan losses
in each of the categories listed at the dates indicated and the
percentage of such amounts to the total allowance and to total loans.
These allocations are no more than estimates and are subject to revision
as conditions change.
<TABLE>
At September 30,
----------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percent of Percent of Percent of
% of Allowance Loans in % of Allowance Loans in % of Allowance Loans in
in each each in each each in each each
Category to Category to Category to Category to Category to Category to
Total Total Total Total Total Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- ----- ------ --------- -----
Real Estate $1,037 35.47% 63.89% $748 32.91% 67.22% $607 47.72% 72.52%
Consumer 424 14.50 30.25 300 13.20 29.38 194 15.25 23.40
Commercial 1,072 36.67 5.86 546 24.02 3.40 141 11.09 4.08
Nonallocated 391 13.36 - 679 29.87 - 330 25.94 -
--- ----- -- --- ----- -- --- ----- --
Total Allowance
for loan losses $2,924 100.00% 100.00% $2,273 100.00% 100.00% $1,272 100.00% 100.00%
====== ======= ======= ====== ======= ======= ====== ======= =======
1996 1995
---- ----
% of Allowance Loans in % of Allowance Loans in
in each each in each each
Category to Category to Category to Category to
Total Total Total Total
Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- -----
Real Estate $427 58.49% 73.58% $462 63.81% 76.49%
Consumer 157 21.51 22.63 170 23.48 21.41
Commercial 146 20.00 3.79 82 11.33 2.10
Nonallocated - - - 10 1.38 -
-- -- -- --- ---- --
Total Allowance
for loan losses $730 100.00% 100.00% $724 100.00% 100.00%
==== ======= ======= ==== ======= =======
</TABLE>
Sources of Funds
General. Deposits, loan repayments and prepayments, proceeds from sales
of loans, cash flows generated from operations and FHLB advances are the primary
sources of the Company's funds for use in lending, investing and for other
general purposes.
Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of checking, money
market, savings, NOW, certificate accounts and Individual Retirement Accounts.
More than 63.0% of the funds deposited in the Company are in certificate of
deposit accounts. At September 30, 1999, core deposits (savings, NOW and money
market accounts) represented 33.8% of total deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Company's deposits are
obtained predominantly from the areas in which its branch offices are located.
The Company has historically relied primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates, and rates offered by competing financial
institutions, significantly affect the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area.
At September 30, 1999, the Company had $51.2 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Maturity Period Amount
--------------- ------
(in thousands)
Three months or less $29,573
Over 3 through 6 months 8,303
Over 6 through 12 months 9,726
Over 12 months 3,598
-----
Total $51,200
=======
Page 19
<PAGE>
The following table sets forth the distribution of the Company's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented and such information during the last three
fiscal years. Averages for the periods presented utilize daily balances.
<TABLE>
At September 30,
1999 1998 1997
---- ---- ----
Percent Percent Percent
Total Total Total
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid
------- -------- --------- ------- -------- --------- ------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts $69,546 20.2% 2.11% $71,102 22.6% 2.26% $72,292 23.4% 2.44%
Money Market
accounts 19,353 5.6 3.38 14,509 4.6 2.91 14,238 4.6 2.81
NOW accounts 31,823 9.2 1.08 30,054 9.5 1.14 27,871 9.0 1.49
Certificates of Deposit 212,933 61.4 5.19 189,306 60.1 5.45 187,270 60.5 5.40
Non-interest-bearing
deposits:
Demand deposits 12,409 3.6 - 10,003 3.2 - 7,614 2.5 -
------ --- -- ------ --- -- ----- --- --
Total average
deposits $346,064 100.00% 3.91% $314,974 100.00% 4.04% $309,285 100.00% 4.11%
======== ======= ===== ======== ======= ===== ======== ======= =====
</TABLE>
Borrowings. The Bank utilizes advances from the FHLB of Pittsburgh as an
alternative to retail deposits to fund its operations as part of its operating
strategy. These FHLB advances are collateralized primarily by certain of the
Bank's mortgage loans and mortgage-related securities and secondarily by the
Bank's investment in capital stock of the FHLB of Pittsburgh. FHLB advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB of
Pittsburgh will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the FHLB of Pittsburgh. At
September 30, 1999, the Bank had $156.0 million in outstanding FHLB advances,
compared to $106.5 million at September 30, 1998. Other borrowings consist of
overnight retail repurchase agreements and for the periods presented were
immaterial.
Liquidity and Capital Resources
The Company'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 Company 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 September 30, 1999 and 1998, the Bank's liquidity ratios were
8.7% and 18.7%, respectively.
At September 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $56.4 million, or 9.5% of total
adjusted assets, which is above the required level of $8.9 million, or 1.5%;
core capital of $56.4 million, or 9.5% of total adjusted assets, which is above
the required level of $17.9 million, or 3.0%; and risk-based capital of $60.5
million, or 19.7% of risk-weighted assets, which is above the required level of
$24.6 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 September 30, 1999, cash and cash
equivalents and investment and mortgage-related securities available for sale
totaled $194.0 million, or 31.7% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At September 30, 1999, the Bank had $156.0 million in
advances outstanding from the FHLB, and had an additional overall borrowing
capacity from the FHLB of $268.6 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 September 30, 1999, the Company had commitments to originate and purchase
loans and unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totaling $43.3 million. The Company anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Certificate accounts, including Individual Retirement Accounts
("IRA") and KEOGH accounts, which are scheduled to mature in less than one year
from September 30, 1999, totaled $183.9 million. The Company expects that
substantially all of the maturing certificate accounts will be retained by the
Company at maturity.
The initial impact of the Conversion on the liquidity and capital resources of
the Company was significant as it substantially increased the liquid assets of
the Company and the capital base on which the Company operates. Additionally,
the Company invested the substantial majority of 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 September 30, 1999, the Bank had total equity, determined in
accordance with GAAP, of $55.5 million, or 9.4% of total assets, which
approximated the Bank's regulatory tangible capital at that date of 9.5% of
assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5.0% is considered to be "well-capitalized" pursuant to
OTS regulations.
Year 2000 Compliance
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 the provision of 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
Page 20
<PAGE>
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 that vendor that the system is Year
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.
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' failures to remedy their own Year 2000
problems. In the event that any of them does 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 Year 2000 preparedness. Respondents have acknowledged their awareness
of Year 2000 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 Year 2000 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 for certain automated computer systems and inconveniences caused by
disruption in command systems.
The contingency plan focuses on mission-critical functions, third-party
relationships, environmental systems, proprietary programs and non-computer
related systems. This 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.
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 unforseen 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 technological improvements
while avoiding specific costly Year 2000 issues. The Company estimates its
expenditures specifically associated with Year 2000 at $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, be it a supplier of services or customer, the
Year 2000 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 were 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.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results generally in terms of historical dollar
amounts without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike industrial companies, nearly
all of the assets and liabilities of the Company are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Impact of New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The Company has
made the appropriate disclosures in the applicable financial statements as
required.
In June 1997, the FASB issued SFAS 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 customer. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The Company operates as a single banking segment.
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-
Page 21
<PAGE>
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 Plan and for Termination Benefits," and
No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than
Pensions," were issued. This Statement is effective for the fiscal years
beginning after December 15, 1997. This Statement required no changes in
disclosures in the Company's financial statements and did not affect the
financial condition, equity or results of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was subsequently amended in July 1999
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133." 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 becomes effective for fiscal years
beginning after December 15, 1998. Earlier adoption is permitted. The Company
adopted SFAS 133, prior to the issuance of SFAS 137, in its fiscal fourth
quarter of 1998, including its provision for the potential reclassification of
investments, resulting in a $56.2 million transfer of securities from
held-to-maturity to available-for-sale and an increase of $597,000 of unrealized
gains, net of taxes, on securities available for sale. The adoption of this
statement did not affect operating results of the Company.
In October 1998, the FASB issued SFAS 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.
Market for Registrant's Common Equity And Related Stockholder Matters
The Company's common stock is traded on The American Stock Exchange under the
symbol NEP. At September 30, 1999, the Company had 1,565 registered common
stockholders of record. The following table sets forth the range of high and low
sales prices for the common stock for each full quarterly period within the most
recent fiscal year since initial trading began April 1, 1998.
<TABLE>
The closing market price of the common stock at September 30, 1999 was 10 3/8.
Stock Price Range
Low High Dividends
--- ---- ---------
<S> <C> <C> <C>
1999 1st quarter 8 15/16 13 1/4 N/A
2nd quarter 10 7/8 12 3/4 .05
3rd quarter 10 11 5/8 .05
4th quarter 10 12 1/4 .06
1998 3rd quarter 13 3/4 16 N/A
4th quarter 9 7/8 14 1/16 N/A
</TABLE>
<TABLE>
Quarterly Financial Data (unaudited)
(In Thousands, Except Per Share Amount)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Interest Income $4,333 $4,331 $4,568 $4,620
Provision for Loan Losses 47 147 149 404
Other Operating Income 384 368 671 445
Other Operating Expense 3,104 3,224 3,419 3,648
Net Income 1,178 1,073 1,341 973
- ----------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic $.20 $.19 $.27 $.19
Diluted $.19 $.19 $.25 $.18
- ----------------------------------------------------------------------------------------------------------------------
1998
Net Interest Income $3,205 $3,401 $4,167 $4,203
Provision for Loan Losses 268 219 292 280
Other Operating Income 160 174 199 423
Other Operating Expense 2,286 7,233 2,709 3,051
Net Income (loss) $558 $(2,491) $991 $895
- ----------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic and Diluted N/A (.53) .17 .15
</TABLE>
Page 22
<PAGE>
Consolidated Statements of Financial Condition
September 30, 1999 and 1998
(in thousands, except share per share data)
<TABLE>
September 30, September 30,
1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents $4,177 $3,053
Securities available for sale 189,835 189,094
Securities held-to-maturity (estimated fair value of $28,315
in 1999 and $32,072 in 1998) 30,332 31,770
Loans (less allowance for loan losses of $2,924 for 1999 and $2,273 for 1998) 364,190 282,706
Accrued interest receivable 4,769 3,998
Assets acquired through foreclosure 98 112
Property and equipment, net 9,868 8,648
Other assets 8,956 2,887
----- -----
Total assets $612,225 $522,268
======== ========
Liabilities and Equity
Deposits $375,983 $324,005
Federal Home Loan Bank advances 155,980 106,498
Other borrowings 524 825
Advances from borrowers for taxes and insurance 1,040 717
Accrued interest payable 1,317 1,028
Other liabilities 1,905 1,761
----- -----
Total liabilities $536,749 $434,834
Preferred stock ($.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 62,119 62,083
Common stock acquired by stock benefit plans (7,066) (4,799)
Retained earnings - substantially restricted 30,818 27,208
Accumulated other comprehensive income (2,874) 2,878
Treasury stock, at cost (626,667 shares) (7,585) -
------- ----
Total equity $75,476 $87,434
------- -------
Total liabilities and equity $612,225 $522,268
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 23
<PAGE>
Consolidated Statements of Operations
For the Years Ended September 30, 1999, 1998 and 1997
(in thousands, except share per share data)
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Loans $24,679 $21,650 $20,071
Mortgage-related securities 4,190 3,362 3,306
Investment securities:
Taxable 5,631 4,345 2,948
Non-taxable 3,174 1,185 274
----- ----- -----
Total interest income 37,674 30,542 26,599
====== ====== ======
Interest expense:
Deposits 13,516 12,715 12,699
Federal Home Loan Bank advances and other 6,306 2,851 1,495
----- ----- -----
Total interest expense 19,822 15,566 14,194
====== ====== ======
Net interest income 17,852 14,976 12,405
Provision for loan losses 747 1,059 651
--- ----- -----
Net interest income after provision for loan losses 17,105 13,917 11,754
------ ------ ------
Non-interest income:
Service charges and other fees 881 678 523
Other income 426 197 127
Insurance premium income 276 48 -
Gain (loss) on sale of:
Real estate owned (56) (86) (66)
Loans 287 55 22
Available-for-sale securities 63 62 (563)
Other (9) 2 (176)
--- ----- -----
Total non-interest income 1,868 956 (133)
Non-interest expense:
Salaries and net employee benefits 7,328 5,916 5,395
Occupancy costs 1,721 1,581 1,421
Federal deposit insurance premiums 294 287 368
Data processing 495 286 365
Professional fees 714 418 274
Federal Home Loan Bank and other service charges 481 392 269
Charitable contributions 93 4,934 82
Other 2,269 1,465 1,318
----- ----- -----
Total non-interest expense 13,395 15,279 9,492
Income (loss) before income taxes 5,578 (406) 2,129
Income tax expense (benefit) 1,013 (359) 748
----- ----- -----
Net income (loss) $4,565 $(47) $1,381
====== ===== ======
Earnings per share -basic .84 (.20) (a) N/A
Earnings per share - diluted .80 (.20) (a) N/A
<FN>
(a) Earnings per share is calculated since March 31, 1998, the date of the
initital public offering. Had the weighted average shares been outstanding for
the entire fiscal year, proforma earnings per share would have been $(.01).
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
Page 24
<PAGE>
Consolidated Statements of Comprehensive Income
<TABLE>
For the Years Ended September 30, 1999, 1998 and 1997
(in thousands, except share per share data)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $4,565 $(47) $1,381
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period (5,710) 1,636 658
Less: Reclassification adjustment for gains (losses)
included in net income 42 41 (372)
-- -- -----
Other comprehensive income (loss) $(5,752) $1,595 $1,030
-------- ------ ------
Comprehensive income (loss) $(1,187) $1,548 $2,411
======== ====== ======
</TABLE>
Page 25
<PAGE>
Consolidated Statements of Changes in Equity
<TABLE>
For the Years Ended September 30, 1999, 1998, and 1997
(in thousands)
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, net of tax 1,030 1,030
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 shares issued) 64 64
Additional paid-in Capital 61,959 61,959
Unearned Employee Stock Ownership
Plan (ESOP) shares (5,142) (5,142)
ESOP shares committed to be released 124 343 467
Net changes in gains (losses) on
securities available for sale, net of tax 1,595 1,595
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 released 77 557 634
Stock awards (41) 488 447
Net changes in gains (losses) on
securities available for sale, net of tax (5,752) (5,752)
Treasury stock at cost, 626,667 shares (7,585) (7,585)
Cash dividend paid (955) (955)
Net income 4,565 4,565
------- -------- -------- -------- -------- --------
Balance September 30, 1999 $ 64 $ 62,119 $(7,066) $ 30,818 $(2,874) $(7,585) $ 75,476
======= ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
Page 26
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net Income (loss) $4,565 $(47) $ 1,381
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision (recovery) for REO loss 39 (4) 153
Provision for loan losses 747 1,059 651
Depreciation 885 621 645
Deferred income tax benefit (193) (1,929) (441)
Funding of First Federal Charitable Foundation - 4,761 -
ESOP shares committed to be released 634 467 -
Stock award expense 447 - -
Amortization and accretion on:
Held-to-maturity securities 34 77 22
Available-for-sale securities 422 222 111
Amortization of deferred loan fees (618) (338) (201)
(Gain) loss on sale of:
Assets acquired thorough foreclosure 56 86 66
Loans (287) (55) (22)
Available-for-sale securities (63) (62) 563
(Gain) loss on disposal of property and equipment 9 (2) 176
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (771) (1,829) 169
Increase in other assets (2,258) (371) (40)
Increase in accrued interest payable 289 283 205
Increase (decrease) in accrued income taxes payable (562) 604 649
Increase (decrease) in other liabilities 635 (469) (1,406)
--- ----- ------
Net cash provided by operating activities $ 4,010 $3,074 $2,681
------- ------ ------
Investing Activities:
Net increase in loans $(89,796) $(30,490) $(21,230)
Proceeds from sale of:
Available-for-sale securities 19,401 6,855 26,530
Assets acquired through foreclosure 170 347 266
Loans 8,219 8,365 1,811
Proceeds from repayments of held-to-maturity securities 17,953 23,041 10,406
Proceeds from repayments of available-for-sale securities 54,860 30,752 13,849
Proceeds from disposal of fixed assets 74 2 -
Purchase of:
Held-to-maturity securities (16,549) (72,166) (5,867)
Available-for-sale securities (80,385) (120,120) (23,904)
Office properties and equipment (2,188) (2,507) (649)
Federal Home Loan Bank stock (4,275) (3,271) -
------- ------- ------
Net cash provided by (used in) investing activities $(92,516) $(159,192) $1,212
--------- ---------- ------
</TABLE>
See accompanying notes to consolidated financial statements
Page 27
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Financing Activities:
Net increase in deposit accounts $51,978 $9,882 $7,317
Net increase (decrease) in Federal Home
Loan Bank short-term advances (1,500) 18,000 (17,000)
Borrowings of Federal Home Loan Bank
long-term advances 51,000 65,000 15,000
Repayments of Federal Home Loan Bank
long-term advances (18) (18) (18)
Net increase (decrease) in advances from
borrowers for taxes and insurance 323 240 (115)
Net increase (decrease)in other borrowings (301) 733 92
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 (955) - -
----- ------ -----
Net cash provided by financing activities $89,630 $145,957 $5,276
------- -------- ------
Increase (decrease) in cash and cash equivalents 1,124 (10,161) 9,169
Cash equivalents, beginning of year 3,053 13,214 4,045
----- ------ -----
Cash and cash equivalents, end of year $4,177 $3,053 $13,214
====== ====== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $19,533 $15,284 $13,989
======= ======= =======
Income taxes $1,726 $665 $540
====== ==== ====
Supplemental disclosure - non-cash and financing information:
Transfer from loans to real estate owned $251 $222 $285
==== ==== ====
Transfer of held-to-maturity securities to
available-for-sale N/A $56,203 N/A
=== ======= ===
Net change in unrealized gains (losses) on
securities available-for-sale, net of tax $(5,752) $1,595 $1,030
======== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
Page 28
<PAGE>
Notes to Consolidated Financial Statement
1. Summary of Significant Accounting Policies.
Business.
Northeast Pennsylvania Financial Corp. (the "Company") provides a wide range of
banking services to individual and corporate customers through its branch
network in Northeast and Central Pennsylvania. The Company's principal
subsidiary, First Federal Bank ("the Bank") serves its loan customers through
two loan production officers located in Monroe and Berks Counties, Pennsylvania.
All of the branches are full-service and offer commercial and retail products.
These products include checking accounts (interest and non-interest bearing),
savings accounts, certificates of deposit, commercial and consumer loans, real
estate loans, and home equity loans. 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., FIDACO, Inc., and Northeast Pennsylvania
Trust Co. First Federal Bank, Abstractors, Inc. and Northeast Pennsylvania Trust
Co. are wholly-owned subsidiaries of Northeast Pennsylvania Financial Corp.
Abstractors, Inc. is a title insurance agency. Northeast Pennsylvania Trust Co.
offers trust, estate and asset management services and products. FIDACO, Inc. is
an inactive subsidiary of First Federal Bank with the only major asset being 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.
The Company follows accounting principles and reporting practices which are in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to determination of
the allowance for loan losses. Management believes that the allowance for loan
losses is adequate.
Risks and Uncertainties. In the normal course of its business, the Company
encounters two significant types of risk: economic and regulatory. There are
three main components of economic risk: interest rate risk, credit risk, and
market risk. The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases from its interest-earning assets. The Company's primary credit
risk is the risk of default on the Company's loan portfolio that results from
the borrowers' inability or unwillingness to make contractually required
payments. The Company's lending activities are concentrated in Pennsylvania. The
largest concentration of the Company's loan portfolio is located in Northeastern
Pennsylvania. The ability of the Company's borrowers to repay amounts owed is
dependent on several factors, including the economic conditions in the
borrowers' geographic region and the borrowers' financial condition. Market risk
reflects changes in the value of the collateral underlying loans, the valuation
of real estate held by the Company, and the valuation of loans held for sale,
mortgage-related securities available for sale and mortgage servicing assets.
The Bank is subject to the regulations of various government agencies. These
regulations can and do change significantly from period to period. The Bank also
undergoes periodic examinations by the regulatory agencies which may subject it
to further changes with respect to asset valuations, amounts of required loss
allowances, and operating restrictions resulting from the regulators' judgements
based on information available to them at the time of their examination.
The Company has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by Year 2000 software failures
due to processing errors arising from calculations using the Year 2000 date.
While the Company believes it is acting prudently to assure Year 2000
compliance, it is to some extent dependent upon vendor cooperation. The Company
is requiring its computer systems and software vendors to represent that the
products provided are or will be Year 2000 compliant and has planned programs of
testing for compliance. It is recognized that any Year 2000 compliance failures,
either internal or on the part of the Company's customers, could result in
additional expense or loss to the Company.
Cash and Cash Equivalents. For the purpose of the consolidated statement of cash
flows, cash and cash equivalents include cash and interest bearing deposits with
an original maturity of three months or less.
Securities. The Company divides its securities portfolio into two segments: (a)
held to maturity and (b) available for sale. Securities in the held to maturity
category are accounted for at cost, adjusted for amortization of premiums and
accretion of discounts, using the level yield method, based on the Company's
intent and ability to hold the securities until maturity. All other securities
are included in the available for sale category and are accounted for at fair
value, with unrealized gains or losses, net of taxes, being reflected as
adjustments to equity.
At the time of purchase, the Company makes a determination as to whether or not
it will hold the securities to maturity, based upon an evaluation of the
probability of future events. Securities which the Company believes may be
involved in interest rate risk, liquidity, or other asset/liability management
decisions, which might reasonably result in such securities not being held to
maturity, are classified as available for sale. If securities are sold, a gain
or loss is determined by specific identification and reflected in the operating
results in the period the trade occurs.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level that management considers adequate to provide for inherent losses, based
upon an evaluation of known and inherent risks in the loan portfolio.
Management's evaluation is based upon an analysis of the portfolio, past loss
experience, current economic conditions, and other relevant factors. While
management uses the best information available to make evaluations, such
evaluations are highly subjective, and future adjustments to the allowance may
be necessary if conditions differ substantially from the assumptions used in
making the evaluations. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank 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 losses are charged directly
against the allowance, and recoveries on previously charged-off loans are added
to the allowance.
Loans are deemed to be "impaired" if upon management's assessment of the
relevant facts and circumstances, it is probable that the Bank will be unable to
collect all proceeds due according to the contractual terms of the loan
agreement. For purposes of applying the measurement criteria for impaired loans,
the Bank excludes large groups of smaller balance homogeneous loans, primarily
consisting of residential real estate and consumer loans, as well as commercial
loans with balances of less than $100,000.
Page 29
<PAGE>
The Company's policy for the recognition of interest income on impaired loans is
the same as for non-accrual loans discussed below. Impaired loans are charged
off when the Company determines that foreclosure is probable, and the fair value
of the collateral is less than the recorded investment of the impaired loan.
Loans, Loan Origination Fees, and Uncollected Interest. Loans are recorded at
cost net of unearned discounts, deferred fees and allowances. Discounts or
premiums on purchased loans are amortized using the interest method over the
remaining contractual life of the portfolio, adjusted for actual prepayments.
Loan origination fees and certain direct origination costs are deferred and
amortized using the level yield method over the contractual life of the related
loans as an adjustment of the yield on the loans.
Uncollected interest receivable on loans is accrued to income as earned.
Non-accrual loans are loans on which the accrual of interest has ceased because
the collection of principal or interest payments is determined to be doubtful by
management. It is the policy of the Bank to discontinue the accrual of interest
when principal or interest payments are delinquent 90 days or more (unless the
loan principal and interest are determined by management to be fully secured and
in the process of collection), or earlier if the financial condition of the
borrower raises significant concern with regard to the ability of the borrower
to service the debt in accordance with the terms of the loan. Interest income on
such loans is not accrued until the financial condition and payment record of
the borrower demonstrates the ability to service the debt.
Loans Held for Sale. Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized through a valuation allowance by
charges to income.
Real Estate Owned (REO). Real estate acquired through foreclosure or by deed in
lieu of foreclosure is classified as REO. REO is carried at the lower of cost
(lesser of carrying value of the loan or fair value of the property at the date
of acquisition, as determined by a certified appraiser) or fair value less
selling expenses. Costs relating to the development or improvement of the
property are capitalized; holding costs are charged to expense.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Depreciation for each class of depreciable asset is
computed using the straight-line method over the estimated useful lives of the
assets (39 years for buildings and 3 to 7 years for furniture and equipment).
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts. The cost of maintenance
and repairs is charged to expense as incurred and renewals and betterments are
capitalized.
Intangible Assets. Intangible assets include a core deposit intangible goodwill
from a branch acquisition and goodwill on the purchase of the title insurance
company, which represents the excess cost over fair value of assets acquired and
liabilities assumed. The core deposit intangible is being amortized to expense
over a ten-year life on an accelerated basis, and goodwill is being amortized to
expense using the straight-line method over periods of five and six years,
respectively. The carrying amount of intangible assets at September 30, 1999 and
1998 is, net of accumulated amortization, $1.6 million and $237,000,
respectively.
Income Taxes. The Company accounts for income taxes under the asset/liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Retained earnings at September 30, 1999 and 1998 include approximately $8.3
million, for which no provision for Federal income tax has been made. These
amounts represent allocations of earnings to bad debt reserves for tax purposes
and are a restriction upon retained earnings. If, in the future, this portion of
retained earnings is reduced for any purpose other than tax bad debt losses,
federal income taxes may be imposed at the then applicable rates.
Earnings per Share. Earnings per share, basic and diluted, were $.84 and $.80
for the year ended September 30, 1999 and $(.20) for the six months ended
September 30, 1998. Proforma earnings per share would have been $(.01) had the
shares been outstanding for the entire twelve month period.
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
For the Year Ended For the Six Months Ended
September 30, September 30,
1999 1998
---- ----
<S> <C> <C>
Net Income $4,565,480 $(1,204,000)
========== ============
Basic:
Weighted average shares issued 5,699,034(1) 5,913,162(1)
Less: Weighted Treasury shares (330,576) -
Plus: ESOP shares released or committed
to be released 65,464 8,570
------ -----
Basic Shares Outstanding 5,433,922 5,921,732
========= =========
Earnings per share - basic $.84 $(.20)
==== ======
Diluted:
Net Income $4,565,480 $(1,204,000)
========== ============
Basic weighted shares outstanding 5,433,922 5,921,732
Dilutive Instruments:
Dilutive effect of stock awards 242,790 -
------- ---------
Dilutive shares outstanding 5,676,712 5,921,732
========= =========
Earnings per share - diluted $.80 $(.20)
==== ======
<FN>
(1) Weighted average shares is net of ESOP shares of 514,188 and average
weighted shares purchased for stock awards of 214,128 at September 30, 1999 and
ESOP shares of 514,188 at September 30, 1998.
</FN>
</TABLE>
Page 30
<PAGE>
2. 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.
The Bank established a liquidation account at the time of the conversion in an
amount equal to the equity of the Bank as of the date of its latest balance
sheet date, September 30, 1997, contained in the final Prospectus used in
connection with the Conversion. In the unlikely event of a complete liquidation
of the Bank, (and only in such an event), eligible depositors who continue to
maintain accounts at the Bank shall be entitled to receive a distribution from
the liquidation account. The total amount of the liquidation account, which
decreases if the balances of eligible deposits decrease at the annual
determination dates, approximated $10.7 million at September 30, 1999.
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 $.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 restrictions thereof. As of September 30, 1999, there were no shares of
preferred stock issued.
3.Securities.
Securities are summarized as follows (in thousands):
<TABLE>
SEPTEMBER 30, 1999
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale securities:
Municipal securities $68,783 $83 $(3,893) $64,973
Obligations of U.S. Government agencies 43,464 2 (1,578) 41,888
Mortgage-related securities 57,086 213 (966) 56,333
Trust Preferred securities 13,749 5 (1,172) 12,582
Corporate Bonds 2,516 6 - 2,522
----- ------ -------- -------
Total debt securities 185,598 309 (7,609) 178,298
Federal Home Loan Bank of Pittsburgh Stock 7,824 - - 7,824
Federal Home Loan Mortgage Corporation Stock 329 2,531 - 2,860
Other equity securities 763 92 (2) 853
----- -- --- ---
Total equity securities 8,916 2,623 (2) 11,537
Total $194,514 $2,932 $(7,611) $189,835
======== ====== ======== ========
Held-to-maturity securities:
Municipal securities $3,549 $- $(389) $3,160
Obligations of U.S. government agencies 26,783 - (1,628) 25,155
------ --- ------- ------
Total $30,332 $- $(2,017) $28,315
======= == ======== =======
Page 31
<PAGE>
SEPTEMBER 30, 1998
------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available-for-sale securities:
Municipal securities $ 47,867 $ 886 $ (21) $ 48,732
Obligations of U.S. Government agencies 55,661 606 (7) 56,260
Mortgage-related securities 74,853 829 (31) 75,651
------ --- ---- ------
Total debt securities 178,381 2,321 (59) 180,643
Federal Home Loan Bank of Pittsburgh Stock 5,325 - - 5,325
Federal Home Loan Mortgage Corporation Stock 697 2,429 - 3,126
--- ----- ----- -----
Total equity securities 6,022 2,429 - 8,451
Total $184,403 $4,750 $(59) $189,094
======== ====== ===== ========
Held-to-maturity securities:
Obligations of U.S. government agencies $31,770 $317 $(15) $32,072
------- ---- ----- -------
Total $31,770 $317 $(15) $32,072
======= ==== ===== =======
</TABLE>
The amortized cost and estimated fair value of securities at September 30, 1999,
by contractual maturity, are shown below (in thousands):
<TABLE>
Maturing Maturing after Maturing after Maturing
within one one year but 5 years but after 10
year within 5 years within 10 years years Total
---- -------------- --------------- ----- -----
<S> <C> <C> <C> <C> <C>
Available-for-sale securities:
Municipal securities $- $709 $13,254 $54,820 $68,783
Obligations of U.S. Government agencies - 3,500 38,465 1,499 43,464
Mortgage-related securities 1,052 - 7,690 48,344 57,086
Equity securities 8,916 - - - 8,916
Trust Preferred securities - - - 13,749 13,749
Corporate Bonds - 2,516 - - 2,516
-- ----- -- ------ -----
Total securities at amortized cost $9,968 $6,725 $59,409 $118,412 $194,514
====== ====== ======= ======== ========
Total securities at fair value $12,580 $6,732 $57,740 $112,783 $189,835
======= ====== ======= ======== ========
Weighted Average Yield 6.12% 6.20% 6.06% 5.93% 5.68%
Held-to-maturity securities:
Municipal securities $- $- $- $3,549 $3,549
Obligations of U.S. Government agencies - - - 26,783 26,783
-- -- -- ------ ------
Total securities at amortized cost $- $- $- $30,332 $30,332
Total securities at fair value $- $- $- $28,315 $28,315
Weighted Average Yield - - - 6.40% 6.40%
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Weighted average yields are based on amortized cost
including municipal securities which are not reported on a tax-equivalent basis.
Proceeds from sales of securities available for sale during the year ended
September 30, 1999 were $19,401,000 resulting in gross realized gains of
$111,775 and gross realized losses of $48,254. Proceeds from sales of securities
available for sale during the year ended September 30, 1998 were $6,855,000
resulting in gross realized gains of $70,003 and gross realized losses of
$7,680.
Securities, carried at approximately $51,809,797, at September 30, 1999, were
pledged to secure public deposits as required by law.
On July 1, 1998, the Bank transferred certain held-to-maturity securities to the
available-for-sale investment portfolio. The amortized cost of the securities
was approximately $56,203,333 with an unrealized gain net of taxes of
approximately $597,053. This transfer was in accordance with a special
reassessment provision contained within Statement of Financial Accounting
Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
which was adopted by the Bank as of July 1, 1998.
Page 32
<PAGE>
4. Loans
Loans are summarized as follows:
<TABLE>
At September 30,
----------------
1999 1998
---- ----
<S> <C> <C>
Real Estate loans:
One- to four-family $196,885 $176,924
Multi-family and commercial 31,497 11,938
Construction 3,983 3,759
----- -----
Total real estate loans $232,365 $192,621
-------- --------
Consumer Loans:
Home equity loans and lines of credit $70,118 $52,244
Automobile 34,619 24,589
Education 2,796 2,351
Unsecured lines of credit 1,744 1,589
Other 5,571 3,423
----- -----
Total consumer loans $114,848 $84,196
-------- -------
Commercial loans $21,262 $9,742
------- ------
Total loans $368,475 $286,559
Less:
Allowances for loan losses (2,924) (2,273)
Deferred loan origination fees (1,361) (1,580)
------- -------
Total loans, net $364,190 $282,706
======== ========
</TABLE>
Impaired loans and the related specific loan loss allowances were as follows (in
thousands):
<TABLE>
September 30,
-------------
1999 1998
---- ----
Allowance Allowance
Recorded for Net Recorded for Net
Investments Losses Investments Investments Losses Investments
----------- ------ ----------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
With specific allowances $1,371 $459 $912 $1,095 $329 $766
Other impaired loans:
With specific allowances $414 $99 $315 $313 $159 $154
---- --- ---- ---- ---- ----
$1,785 $558 $1,227 $1,408 $488 $920
====== ==== ====== ====== ==== ====
</TABLE>
The average net recorded investment in impaired loans for the years ended
September 30, 1999, 1998, and 1997, respectively, was $1,166,594, $898,266, and
$577,951. The related amount of interest income recognized on impaired loans was
$90,000, $73,000, and $39,000 for the years ended September 30, 1999, 1998, and
1997, respectively.
Non-accrual loans totaled $1,371,000, $1,239,000, and $774,000 at September 30,
1999, 1998, and 1997, respectively. Loans in non-accrual status as of September
30, 1999, 1998 and 1997 had interest due but not recognized of approximately
$70,000, $58,000 and $33,000, respectively. The amount of interest income on
these loans that was included in net income in fiscal year 1999, 1998 and 1997
was $69,000, $55,000 and $53,000, respectively. There were no troubled debt
restructuring loans at September 30, 1999 and 1998. The Bank has no commitments
to lend additional funds to borrowers whose loans were classified as
non-performing or troubled debt restructuring.
The activity in the allowance for loan losses is as follows (in thousands):
<TABLE>
September 30,
-------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $2,273 $1,272 $730
Provision charged to income 747 1,059 651
Charge-offs (101) (76) (132)
Recoveries 5 18 23
- -- --
Balance, ending $2,924 $2,273 $1,272
====== ====== ======
</TABLE>
Page 33
<PAGE>
An analysis of the activity of loans to directors and executive officers is as
follows (in thousands):
<TABLE>
September 30, 1999
------------------
<S> <C>
Balance, beginning of year $ 805
New loans and line of credit advances 628
Repayments (60)
----
Balance, end of year $ 1,373
=======
</TABLE>
5. Mortgage Servicing Activity
A summary of mortgage servicing rights activity follows:
<TABLE>
Years Ended September 30,
-------------------------
(in thousands)
1999 1998
---- ----
<S> <C> <C>
Balance, beginning of year $62 $-
Originated servicing rights 275 66
Amortization (34) (4)
---- ---
Balance, end of year $303 $62
==== ===
</TABLE>
At September 30, 1999, 1998, and 1997, the Bank serviced loans for others of
$49,741,195, $15,805,965, and $14,197,000, respectively. Loans serviced by
others for the Bank as of September 30, 1999, 1998, and 1997 were: $60,341,796,
$5,960,235, and $7,721,000, respectively.
6. Office Properties and Equipment
Properties and equipment by major classification are summarized as follows (in
thousands):
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Land $1,184 $854
Buildings and improvements 8,843 8,174
Furniture, fixtures and equipment 5,008 4,928
Leasehold improvements 844 694
--- ---
Total $15,879 $14,650
Less accumulated depreciation 6,011 6,002
----- -----
Net $9,868 $8,648
====== ======
</TABLE>
The Bank has entered into operating leases for several of its branch facilities.
The minimum annual rental payments under these leases at September 30, 1999, are
as follows (in thousands):
<TABLE>
Years Ending September 30,
--------------------------
<S> <C> <C>
2000 $221
2001 190
2002 120
2003 108
2004 35
2005 and after 4
Total $678
====
</TABLE>
Rent expense was $230,000, $263,000, and $261,000, for the years ended September
30, 1999, 1998, and 1997, respectively.
Page 34
<PAGE>
7. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
At September 30,
----------------
1999 1998
---- ----
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Total Rate Amount Total
---- ------ ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Savings accounts
(passbook, statement, clubs) 2.08% $69,667 18.53% 2.26% $69,956 21.6%
Money market accounts 3.60% 21,132 5.62% 3.12% 16,368 5.0%
Certificates of deposit
less than $100,000 5.32% 185,790 49.41% 5.45% 163,318 50.5%
Certificates of deposit
greater than $100,000 (A) 5.32% 51,200 13.62% 5.45% 32,750 10.1%
NOW Accounts 1.32% 35,339 9.40% 1.24% 31,182 9.6%
Non-interest bearing deposits - 12,855 3.42% - 10,431 3.2%
-- ------ ----- -- ------ ----
Total deposits at end of period 3.71% $375,983 100.00% 4.05% $324,005 100.0%
===== ======== ======= ===== ======== ======
</TABLE>
(A) Deposit balances in excess of $100,000 are not federally insured.
The certificates of deposit frequently are renewed at maturity rather than paid
out; a summary of certificates by contractual maturity at September 30, 1999 is
as follows (in thousands):
<TABLE>
Years Ending September 30,
--------------------------
Amount
<S> <C> <C>
2000 $183,867
2001 36,279
2002 9,103
2003 4,839
2004 2,902
2005 and thereafter 0
-
Total $236,990
========
</TABLE>
Interest expense on deposits is comprised of the following (in thousands):
<TABLE>
Years Ended September 30,
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Savings accounts $ 1,464 $ 1,607 $ 1,765
Money market accounts 655 417 399
Certificates less than $100,000 9,381 9,139 10,120
Certificates greater than $100,000 1,672 1,180 -*
NOW Accounts 344 372 415
--- --- ---
Total $13,516 $12,715 $12,699
======= ======= =======
</TABLE>
* Information regarding interest expense on certificates of deposit of $100,000
or greater was not available prior to June 1997.
8. Federal Home Loan Bank Advances
Under terms of its collateral agreement with the Federal Home Loan Bank of
Pittsburgh ("FHLB"), the Bank maintains otherwise unencumbered qualifying assets
(principally 1-4 family residential mortgage loans and U.S. Government and
Agency notes and bonds) in the amount of at least as much as its advances from
the FHLB. The Bank's FHLB stock is also pledged to secure these advances. At
September 30, 1999 and 1998, such advances mature as follows (in thousands):
<TABLE>
Due by September 30, Weighted Average Rate September 30, 1999
-------------------- --------------------- ------------------
<S> <C> <C> <C>
2000 5.56% $29,500
2001 6.20 6,000
2002 5.60 15,000
2003 5.48 15,000
2004 4.50 102
Thereafter 5.14 90,378
---- ------
Total FHLB advances 5.34% $155,980
===== =======
Page 35
<PAGE>
Due by September 30, Weighted Average Rate September 30, 1998
-------------------- --------------------- ------------------
1999 5.58% $ 26,000
2000 5.17 5,000
2001 5.43 5,000
2002 5.56 25,000
2003 - -
Thereafter 5.03 45,498
---- ------
Total FHLB advances 5.31% $106,498
===== =======
</TABLE>
The Bank has included in the preceding table annually renewable lines of credit
totaling $50,000,000. The Bank, from time to time, has used the lines of credit
to meet liquidity needs. At September 30, 1999 and 1998, the balances
outstanding on the lines of credit were $24,500,000 and $26,000,000,
respectively, with interest rates at the overnight FHLB borrowing rate which was
5.63% at September 30, 1999.
The Bank has utilized advances from the FHLB which have callable features. The
advances have a fixed rate for a specified period of time after which the FHLB
can, at its option, convert the advance to a variable rate. The Bank, at the
same time, can repay the advance penalty free.
9. Income Taxes
The Small Business Job Protection Act of 1996, enacted August 20, 1996, provides
for the repeal of the tax bad debt deduction computed under the percentage of
taxable income method. The repeal of the use of this method is effective for tax
years beginning after December 31, 1995. Prior to the change in law, the Bank
had qualified under the provisions of the Internal Revenue Service Code which
permitted it to deduct from taxable income an allowance for bad debts based on
8% of taxable income.
Upon repeal, the Bank is required to recapture into income, over a six year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if the Bank ceases to qualify as
a bank for Federal income tax purposes, are restricted with respect to certain
distributions. The Bank's total tax bad debt reserves at September 30, 1999, are
approximately $8.7 million, of which $8.3 million represents the base year
amount and $420,000 is subject to recapture. The Bank has previously recorded a
deferred tax liability for the amount to be recaptured; therefore, this
recapture will not impact the statement of income.
The provision (benefit) for income taxes is summarized as follows (in
thousands):
<TABLE>
Year Ended September 30,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $1,021 $1,434 $1,105
State 185 136 84
Deferred - Federal (193) (1,929) (441)
----- ------- -----
Total $1,013 $(359) $748
===== ===== ===
</TABLE>
The provision (benefit) for income taxes differs from the statutory rate due to
the following (in thousands):
<TABLE>
Year Ended September 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax (benefit) at
statutory rate $1,897 $ (138) $ 724
Tax exempt interest, net (1,013) (409) (102)
State taxes, net of Federal benefit 122 90 56
Excess ESOP compensation expense 23 42 -
Other, net (16) 56 70
---- ---- --
Total $1,013 $ (359) $ 748
===== ===== ====
</TABLE>
The components of the net deferred tax liability (asset) are as follows (in
thousands):
<TABLE>
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Loan fees and costs $(108) $ (201)
ESOP funding difference (131) (117)
Recognition and retention plan (153) -
Deferred compensation (195) (154)
Foreclosed asset writedowns (8) (15)
Provision for abandoned assets - (59)
Unrealized losses on available-for-sale securities (1,805) -
Accrued hospitalization (42) (40)
Charitable contributions (1,445) (1,532)
Book bad debt reserves - loans (1,088) (856)
Intangibles amortization (37) -
---- -
Gross deferred tax assets $(5,012) $ (2,974)
-------- ---------
Page 36
<PAGE>
Deferred tax liabilities:
Depreciation $91 $ 36
Accretion 36 15
Unrealized holding gains on available-for-sale securities - 1,813
Tax bad debt reserves in excess of base year 143 179
Title plant 26 26
-- --
Gross deferred tax liabilities 296 2,069
--- -----
Net deferred tax liability (asset) $(4,716) $ (905)
======= =====
</TABLE>
10. Stock Option Plan
The Company adopted a stock option plan in October 1998 ("the Plan") for
officers, directors and certain employees of the Company or its subsidiaries.
Pursuant to the terms of the Plan, the number of common shares reserved for
issuance is 642,735 of which 24,380 options remain unawarded. All options have
been issued at not less than fair market value at the date of grant and expire
in 10 years from date of grant. All stock options granted vest over a five year
period from the date of grant.
A summary of the status of the Company's Stock Option Plan as of September 30,
1999 and changes during the year is presented below:
<TABLE>
1999
----
Weighted-
Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Stock Options:
Outstanding at beginning of year - $-
Granted 627,220 11.60
Forfeited (8,865) 11.75
-------
Outstanding at end of year 618,355 $11.68
Exercisable at end of year -
Weighted-average fair value
of awards granted $4.09
</TABLE>
The Black-Scholes option pricing model was used to determine the grant-date
fair-value of options. Significant assumptions used in the model included a
weighted average risk-free rate of return of 5.9% in 1999; expected option life
of 10 years; and expected stock price volatility of 33.62% for 1999 awards;
expected dividend yield of 2.01%.
SFAS No. 123, "Accounting for Stock-based Compensation" (SFAS 123), encourages,
but does not require, the adoption of fair-value accounting for stock-based
compensation to employees. The Company, as permitted, has elected not to adopt
the fair value accounting provisions of SFAS 123, and has instead continued to
apply APB Opinion 25 and related Interpretations in accounting for the plans and
to provide the required proforma disclosures for SFAS 123. At September 30,
1999, there were 0 shares exercisable, therefore, no compensation expense would
have been recognized under the grant-date fair-value provisions of SFAS 123.
The effects on proforma net income and diluted earnings per share of applying
the disclosure requirement of SFAS 123 in past years may not be representative
of the future proforma effects on net income and EPS due to the vesting
provisions of the options and future awards that are available to be granted.
The following table summarizes all stock options outstanding for the Plan as of
September 30, 1999, segmented by range of exercise prices:
<TABLE>
Outstanding
-------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Remaining
Number Price Contractual Life
------ ----- ----------------
<S> <C> <C> <C>
Stock Options:
$10.00-$10.12 1,045 $10.00 10.0 years
$10.13-$10.62 2,955 10.13 9.6
$10.63-$11.37 3,045 10.63 9.7
$11.38-$11.62 5,910 11.38 9.8
$11.63-$11.74 2,955 11.63 9.8
$11.75-$12.74 600,445 11.75 9.1
$12.75-$12.77 2,000 12.75 9.4
----- ----- ---
618,355 $11.68 9.6 years
======= ====== =========
</TABLE>
Page 37
<PAGE>
11. Financial Instruments
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. Commitments to
originate loans amounted to $16.8 million as of September 30, 1999, of which
$15.0 million was for variable-rate loans. The balance of the commitments
represent fixed-rate loans with interest rates ranging from 7.0% to 9.0%. In
addition, at September 30, 1999, the Company had undisbursed loans in process
for construction loans of $4.1 million and $22.4 million in undisbursed lines of
credit. These instruments involve, to varying degrees, elements of credit,
interest rate or liquidity risk in excess of the amount recognized in the
balance sheet. The contract or notional amounts of these commitments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss from nonperformance by the other party to
the financial instruments for commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company on
extensions of credit, is based on management's credit assessment of the
counterparty. At September 30, 1999, the Company expects all commitments to be
funded within 60 days.
The Company is required to disclose estimated fair values for its financial
instruments. The following describes various limitations and assumptions related
to such fair value disclosures.
Limitations. Estimates of fair value are made at a specific point in time based
upon, where available, relevant market prices and information about the
financial instrument. Such estimates do not include any premium or discount that
could result from offering for sale at one time the Company's entire holdings of
a particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies is likely to result in significantly different fair
value estimates.
The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill, or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of non-interest-bearing demand deposits,
savings, NOW accounts and money market deposit accounts is equal to the carrying
amount because these deposits have no stated maturity. Obviously, this approach
to estimating fair value excludes the significant benefit that results from the
low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.
The following methods and assumptions were used to estimate the fair value of
each major classification of financial instruments at September 30, 1999 and
1998.
Cash and cash equivalents. Current carrying amounts approximate estimated fair
value.
Securities. Current quoted market prices were used to determine fair value.
Loans. Fair values were estimated for portfolios of loans with similar financial
characteristics. Loans were segregated by type, and each loan category was
further segmented by fixed and adjustable-rate interest terms. The estimated
fair value of the segregated portfolios was calculated by discounting cash flows
through the estimated maturity using estimated prepayment speeds while using
estimated market discount rates that reflect credit and interest rate risk
inherent in the loans. The estimate of the maturities and prepayment speeds was
based on the Company's historical experience. Cash flows were discounted using
market rates adjusted for portfolio differences.
Accrued interest receivable. Current carrying amounts approximate estimated fair
value.
Deposits with no stated maturity. Current carrying amounts approximate estimated
fair value.
Certificates of deposit. Fair values were estimated by discounting the
contractual cash flows using current market rates offered in the Company's
market area for deposits with comparable terms and maturities.
Federal Home Loan Bank Advances. The fair value of borrowings was estimated
using rates currently available to the Company for debt with similar terms and
remaining maturities.
Other borrowings. Current carrying amounts approximate estimated fair value.
Accrued interest payable. Current carrying amounts approximate estimated fair
value.
Commitments to extend credit. The majority of the Company's commitments to
extend credit carry current market interest rates if converted to loans. Because
commitments to extend credit are generally unassignable by either the Company or
the borrower, they only have value to the Company and the borrower. The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counter
parties.
Page 38
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows (in thousands):
<TABLE>
At September 30,
----------------
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $4,177 $4,177 $ 3,053 $3,053
Securities available for sale 189,835 189,835 189,094 189,094
Securities held-to-maturity 30,332 28,315 31,770 32,072
Loans 364,190 360,489 282,706 292,220
Accrued interest receivable 4,769 4,769 3,998 3,998
Financial Liabilities:
Deposits with no stated maturity which
consist of savings, money market, NOW
and non-interest bearing deposits $138,993 $138,993 $127,937 $127,937
Certificates of deposit 236,990 234,737 196,068 196,534
Federal Home Loan Bank advances 155,980 155,174 106,498 109,373
Other borrowings 524 524 825 825
Accrued interest payable 1,317 1,317 1,028 1,028
Unearned ESOP shares 4,242 4,401 4,799 5,399
Contractual Estimated Contractual Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Off balance sheet assets (liabilities):
Loan commitments $20,913 $314 $8,335 $125
Consumer lines of credit 15,541 - 14,189 -
Commercial lines of credit 6,893 1 4,313 8
</TABLE>
12. Regulatory Matters The Bank is subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital and tangible capital
(as defined) to total assets (as defined). Management believes, as of September
30, 1999, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 1999, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum ratios as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the institution's category.
Page 39
<PAGE>
The Bank's actual capital amounts and ratios at September 30, 1999 and 1998 are
also presented in the following table (in thousands):
<TABLE>
As of September 30, 1999
------------------------
To be Well Capitalized
For Capital under prompt corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Risk-based Capital
(Total Capital to risk weighted
assets) $60,461 19.7% $24,573 >8.0% $30,716 >10.0%
Tier I Capital
(to risk weighted assets) 56,398 18.4% 12,286 >4.0% 18,429 >6.0%
Core Capital
(Tier I Capital to total assets) 56,398 9.5% 17,866 >3.0% 29,777 >5.0%
Tangible Capital
(Tier I Capital to total assets) 56,398 9.5% 8,933 >1.5% N/A N/A
As of September 30, 1998
------------------------
Risk-based Capital
(Total Capital to risk weighted
assets) $57,293 22.8% $20,094 >8.0% $25,117 >10.0%
Tier I Capital
(to risk weighted assets) 55,020 21.9% 10,047 >4.0% 15,070 >6.0%
Core Capital
(Tier I Capital to total assets) 55,020 11.2% 14,736 >3.0% 24,560 >5.0%
Tangible Capital
(Tier I Capital to total assets) 55,020 11.2% 7,368 >1.5% N/A N/A
<FN>
(1)Tangible and core capital are completed as a percentage of total assets of
$596 million and $491 million at September 30, 1999 and 1998, respectively.
Risk-based capital and Tier I capital is computed as a percentage of total
risk-weighted assets of $307 million and $251 million at September 30, 1999
and 1998, respectively.
</FN>
</TABLE>
13. Employee Benefit Plans
Defined Benefit Plan
The Company participates in a multiple-employer defined benefit pension plan
covering all employees meeting eligibility requirements of being at least age 21
with one year of service with the Company. Because of the multiple-employer
nature of the plan, information regarding the Company's portion of present
values of vested and nonvested benefits is not available. The plan is fully
funded and no contributions were required during the years ended September 30,
1999, 1998 and 1997.
401K Plan
Effective March 7, 1994, the Bank implemented a Section 401(k) defined
contribution plan which covers substantially all of its employees. The Company
made contributions to this plan of approximately $182,000, $88,000 and $83,000
for the years ended September 30, 1999, 1998 and 1997, respectively.
Employee Stock Ownership Plan
Effective April 1, 1998, the Company adopted an Employee Stock Ownership Plan
("ESOP"). The Plan is designed to provide retirement benefits for eligible
employees. Because the Plan invests in the stock of the Company, it will also
give eligible employees an opportunity to acquire an ownership interest in the
Company. Employees are eligible to participate in the Plan after reaching age
21, and completing six months of service. Benefits become 100% vested after five
years, with a 20% vesting occurring each year.
The ESOP purchased 8% or 514,188 shares of the common stock issued in the
Conversion. The ESOP borrowed 100% of the aggregate purchase price of the Common
Stock, or $5,141,880, from the Company. The loan has a 10 year term, with an
annual interest rate of prime (8.25%, at September 30, 1999) and will be repaid
principally from the Company's contributions to the ESOP. The Company recognized
$634,000 and $467,000 in compensation and benefit expense related to the ESOP
for the years ended September 30, 1999 and 1998, respectively.
Shares purchased by the ESOP will initially be pledged as collateral for the
loan and will be held in a suspense account until released for allocation among
participants as the loan is repaid. The pledged shares will be released annually
from the suspense account in an amount proportional to the repayment of the ESOP
loan for each plan year. The released shares will be allocated among the
accounts of participants on the basis of the participant's compensation for the
year of allocation.
A total of 55,704 shares have been committed to be released in fiscal 1999. In
fiscal 1998, 34,278 shares were released.
14. Recent Accounting Pronouncements
In June 1997, the FASB issued 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
Page 40
<PAGE>
No. 130 is effective for fiscal years beginning after December 15, 1997. The
Company has made the appropriate disclosures in the applicable financial
statements as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The Company currently operates as a single banking segment.
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
is effective for the fiscal years beginning after December 15, 1997. This
statement required no changes in disclosures in the Company's financial
statements and did not affect the financial condition, equity or operating
results of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which was subsequently amended in July 1999
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133." 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 becomes effective for fiscal years
beginning after December 15, 1998. Earlier adoption is permitted. The Company
adopted SFAS 133, prior to the issuance of SFAS 137, in its fourth fiscal
quarter of 1998, including its provision for the potential reclassification of
investments, resulting in a $56.2 million transfer of securities from
held-to-maturity to available-for-sale and an increase of $597,000 of unrealized
gains, net of taxes, on securities available for sale. The adoption of this
statement did not affect operating results of the Company.
In October 1998, the FASB issued SFAS 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 form 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.
15. Related Party Transactions
The Company retains a law firm, in which the Chairman of the Company's Board of
Directors also is a partner, that provides general legal counsel to the Company.
The Company paid legal fees to this law firm of $31,000, $29,173, and $49,859
for the years ended September 30, 1999, 1998, and 1997, respectively.
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<PAGE>
16. Parent Company Financial Information
<TABLE>
Condensed Statement of Financial Condition
September 30,
-------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Assets:
Cash $503 $1,189
Investment in Subsidiaries 56,475 58,796
Securities available for sale 15,474 25,281
Accrued interest receivable 330 292
Due from affiliates 879 480
Other Assets 1,964 1,692
----- -----
$75,625 $87,730
======= =======
Liabilities and stockholders' equity:
Other liabilities 149 296
--- ---
Total Liabilities 149 296
--- ---
Stockholders' equity:
Common stock 64 64
Additional paid-in-capital 62,119 62,083
Common stock acquired by stock benefit plans (7,066) (4,799)
Retained earnings-substantially restricted 30,818 27,208
Accumulated other comprehensive income (2,874) 2,878
Treasury stock (7,585) -
------- --
Total stockholders' equity $75,476 $87,434
------- -------
$75,625 $87,730
======= =======
Condensed Statement of Operations
For the Years Ended September 30,
---------------------------------
1999 1998
---- ----
(in thousands)
Income:
Interest income $1,274 $833
Other income 41 -
Equity in undistributed income of the subsidiary 4,203 2,772
----- -----
5,518 3,605
----- -----
Expenses:
Other operating expenses 724 5,005
----- -----
724 5,005
----- -----
Income (loss) before income taxes 4,794 (1,400)
Income tax expense (benefit) 229 (1,353)
--- -------
Net income (loss) $4,565 $(47)
====== =====
</TABLE>
Page 42
<PAGE>
Condensed Statements of Cash Flows
For the Years Ended September 30, 1999 and 1998
(in thousands)
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Operating Activities:
Net Income (loss) $4,565 $(47)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Deferred income tax (benefit) provision (5,053) 1,266
Funding of First Federal Charitable Foundation - 4,761
Reduction in unallocated ESOP shares 634 467
Stock award expense 447 -
Amortization and accretion on:
Available-for-sale securities 181 14
Gain on sale of:
Available-for-sale securities (40) -
Changes in assets and liabilities:
Increase in other assets (394) (1,126)
Increase (decrease) in other liabilities (147) 296
----- ---
Net cash provided by operating activities $ 193 $5,631
----- ------
Investing Activities:
Capital investment in subsidiary bank $- $27,255
(Increase) decrease in investment in subsidiaries 1,324 (57,799)
Proceeds from sale of:
Available-for-sale securities 15,302 800
Proceeds from repayments of held-to-maturity securities 997 -
Proceeds from repayments of available-for-sale securities 5,486 -
Purchase of:
Held-to-maturity securities - (997)
Available-for-sale securities (12,136) (25,821)
-------- --------
Net cash provided by (used in) investing activities $10,973 $(56,562)
------- ---------
Financing Activities:
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 (955) -
----- --
Net cash provided by (used in) financing activities $(11,852) $52,120
--------- -------
Increase (decrease) in cash and cash equivalents (686) 1,189
Cash and cash equivalents, beginning of year 1,189 -
----- --
Cash and cash equivalents, end of year $503 $1,189
==== ======
</TABLE>
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<PAGE>
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Page 44
<PAGE>
Management's Statement on Financial Reporting
To Our Shareholders:
The management of Northeast Pennsylvania Financial Corp. and
subsidiaries (the "Company") is responsible for the preparation, integrity and
fair presentation of its published financial statements. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and, as such, include amounts that are based on judgments
and estimates of management.
There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can only provide reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the degree of
effectiveness of an internal control structure may vary over time.
Management assessed the Company's internal control structure over
financial reporting presented in conformity with generally accepted accounting
principles. This assessment was based on criteria for effective internal control
over financial reporting described in "Internal Control-Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management believes the Company maintained an
effective internal control structure over financial data, presented in
accordance with generally accepted accounting principles.
The Company assessed its compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that Northeast Pennsylvania Financial Corp. and subsidiaries
complied, in all material respects, with the designated laws and regulations
related to safety and soundness for the year ended September 30, 1999.
/s/ E. Lee Beard /s/ Patrick J. Owens, Jr.
E. Lee Beard Patrick J. Owens, Jr.
President & Senior Vice President
Chief Executive Officer & Chief Financial Officer
Page 45
<PAGE>
Independent Auditors' Report
To The Board of Directors
Northeast Pennsylvania Financial Corp.
Hazleton, Pennsylvania:
We have audited the accompanying consolidated statements of financial
condition of Northeast Pennsylvania Financial Corp. and subsidiaries (the
"Company") as of September 30, 1999 and 1998 and the related consolidated
statements of operations, comprehensive income, changes in equity, and cash
flows for each of the years in the three year period ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1999 and 1998 and the results of its operations and its cash
flows for each of the years in the three year period ended September 30, 1999,
in conformity with generally accepted accounting principles.
As discussed in Notes 3 and 14 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standard No.
133, Accounting for Derivative Instruments and Hedging Activities, as of July 1,
1998.
/s/ KPMG LLP
Philadelphia, Pennsylvania
October 19,1999
Page 46
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Annual
Report to Shareholdres as incorporated by reference into this 10K and is
qualified in its entirety by reference to the audited financial statements
contained herein.
</LEGEND>
<CIK> 0001050996
<NAME> Northeast Pennsylvania Financial Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,185
<INT-BEARING-DEPOSITS> 2,992
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,835
<INVESTMENTS-CARRYING> 30,332
<INVESTMENTS-MARKET> 28,315
<LOANS> 364,190
<ALLOWANCE> 2,924
<TOTAL-ASSETS> 612,225
<DEPOSITS> 375,983
<SHORT-TERM> 25,024
<LIABILITIES-OTHER> 4,262
<LONG-TERM> 131,480
0
0
<COMMON> 64
<OTHER-SE> 75,412
<TOTAL-LIABILITIES-AND-EQUITY> 612,225
<INTEREST-LOAN> 24,679
<INTEREST-INVEST> 8,805
<INTEREST-OTHER> 4,190
<INTEREST-TOTAL> 37,674
<INTEREST-DEPOSIT> 13,516
<INTEREST-EXPENSE> 19,822
<INTEREST-INCOME-NET> 17,852
<LOAN-LOSSES> 747
<SECURITIES-GAINS> 63
<EXPENSE-OTHER> 13,395
<INCOME-PRETAX> 5,578
<INCOME-PRE-EXTRAORDINARY> 5,578
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,565
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 7.34
<LOANS-NON> 1,371
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,273
<CHARGE-OFFS> (101)
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 2,924 <F1>
<ALLOWANCE-DOMESTIC> 2,522
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 391 <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>
