UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-13793
- -------------------------------------------------------------------------------
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
- -------------------------------------------------- ----------------------------
DELAWARE 06-1504091
- ------------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201
- ------------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(570) 459-3700
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(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No __
APPLICABLE ONLY TO CORPORATE ISSUERS.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: The Registrant had
5,800,683 shares of Common Stock outstanding as of May 12, 1999.
<PAGE>
TABLE OF CONTENTS
Item
No.
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
March 31, 1999 (unaudited) and September 30, 1998............. 1
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (unaudited)........................... 2-3
Consolidated Statements of Operations for the Six Months Ended
March 31, 1999 and 1998 (unaudited)........................... 4-5
Consolidated Statements of Changes in Equity for the Years Ended
September 30, 1998 and 1997 and the Six Months Ended March 31, 1999 6
Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998(unaudited).............................. 7-8
Notes to Consolidated Financial Statements (unaudited)......... 9-13
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14-26
3 Quantitative and Qualitative Disclosures about Market Risk..... 27
Part II - OTHER INFORMATION
1 Legal Proceedings............................................. 28
2 Changes in Securities and Use of Proceeds..................... 28
3 Defaults Upon Senior Securities............................... 28
4 Submission of Matters to a Vote of Security Holders........... 28
5 Other Information............................................. 28
6 Exhibits and Reports on Form 8 - K............................ 28-29
Signatures
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Financial Condition
March 31, 1999 (unaudited) and September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
Assets (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,186 $ 3,053
Securities available-for-sale 198,410 189,094
Securities held-to-maturity (estimated fair value of $29,909 at
March 1999 and $32,072 in September 1998) 28,347 31,770
Loans (less allowance for loan losses of $2,402 for March 1999 and
$2,273 for September 1998) 312,437 282,706
Accrued interest receivable 4,003 3,998
Assets acquired through foreclosure 50 112
Property and equipment, net 8,964 8,648
Other assets 3,536 2,887
----- -----
Total assets $ 557,933 $ 522,268
========= =========
Liabilities and Equity
Deposits $ 344,514 $ 324,005
Federal Home Loan Bank advances 127,989 106,498
Other borrowings 278 825
Advances from borrowers for taxes and insurance 1,037 717
Accrued interest payable 962 1,028
Other liabilities 1,945 1,761
----- -----
Total liabilities $ 476,725 $ 434,834
--------- ---------
Preferred stock ($.01 par value; 2,000,000 authorized shares; 0
shares issued) - -
Common stock ($.01 par value; 16,000,000 authorized shares;
6,427,350 shares issued) 64 64
Additional paid-in capital 62,115 62,083
Common stock acquired by stock benefit plans (7,811) (4,799)
Retained earnings - substantially restricted 29,138 27,208
Accumulated other comprehensive income 1,764 2,878
Treasury stock, at cost (321,368 shares) (4,062) -
------- -
Total equity $ 81,208 $87,434
-------- -------
Total liabilities and equity $ 557,933 $ 522,268
========= =========
</TABLE>
-1-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998 (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1999 March 31, 1998
(unaudited)
<S> <C> <C>
Interest Income:
Loans $ 5,805 $ 5,258
Mortgage-related securities 1,093 688
Investment securities:
Taxable 1,274 962
Non-taxable 803 206
--- ---
Total interest income 8,975 7,114
Interest Expense:
Deposits 3,294 3,084
Federal Home Loan Bank advances and other 1,350 629
----- ---
Total interest expense 4,644 3,713
Net interest income 4,331 3,401
Provision for loan losses 135 219
--- ---
Net interest income after provision for loan losses 4,196 3,182
Non-interest Income:
Service charges and other fees 194 153
Other income 97 23
Insurance premium income 78 -
Gain (loss) on sale of:
Real estate owned (15) -
Loans 15 (2)
Available-for-sale securities (1) -
-------- ------
Total non-interest income 368 174
Non-interest Expense:
Salaries and net employee benefits 1,844 1,459
Occupancy costs 423 386
Federal deposit insurance premiums 74 72
Data processing 117 62
Professional fees 204 73
Federal Home Loan Bank service charges 96 101
Charitable contributions 37 4,773
Other 441 307
--- ---
Total non-interest expense 3,236 7,233
Income (loss) before income taxes 1,328 (3,877)
Income taxes 255 (1,386)
--- -------
Net income (loss) $1,073 $(2,491)
====== ========
</TABLE>
-2-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended March 31, 1999 and 1998 (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $ (811) $ 90
Less: Reclassification adjustment for gains included in
net income (1) -
---- ----
Other comprehensive income (loss) $ (810) $ 90
Comprehensive income (loss) $ 263 $ (2,401)
===== =========
Earnings per share - basic $ 0.19 N/A
====== ===
Earnings per share - diluted $ 0.19 N/A
====== ===
</TABLE>
-3-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Six Months Ended March 31, 1999 and 1998 (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Interest Income:
Loans $ 11,548 $ 10,526
Mortgage-related securities 2,297 1,399
Investment securities:
Taxable 2,638 1,769
Non-taxable 1,460 334
----- -----
Total interest income 17,943 14,028
Interest Expense:
Deposits 6,610 6,314
Federal Home Loan Bank advances and other 2,670 1,107
----- -----
Total interest expense 9,280 7,421
Net interest income 8,663 6,607
Provision for loan losses 183 487
--- ---
Net interest income after provision for loan losses 8,480 6,120
Non-interest Income:
Service charges and other fees 411 308
Other Income 182 45
Insurance premium income 123 -
Gain (loss) on the sale of:
Real estate owned (30) (34)
Loans 35 4
Available-for-sale securities 33 8
Other (1) 2
--- ----
Total non-interest income 753 333
Non-interest Expense:
Salaries and net employee benefits 3,560 2,683
Occupancy costs 842 760
Federal deposit insurance premiums 146 143
Data processing 242 136
Professional fees 427 120
Federal Home Loan Bank and other service charges 193 178
Charitable contributions 45 4,898
Other 885 579
--- ---
Total non-interest expense 6,340 9,497
Income (loss) before income taxes 2,893 (3,044)
Income taxes 642 (1,110)
--- -------
Net income (loss) $ 2,251 $ (1,934)
======= =========
</TABLE>
-4-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Six Months Ended March 31, 1999 and 1998 (unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period $(1,136) $ 494
Less: Reclassification adjustment for gains included in
net income 22 5
------- ----------
Other comprehensive income (loss) $ (1,114) $ 489
Comprehensive income (loss) $ 1,137 $ (1,445)
======= =========
Earnings per share - basic $ 0.39 N/A
====== ===
Earnings per share - diluted $ 0.38 N/A
====== ===
</TABLE>
-5-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 1998 and 1997,
and the Six Months Ended March 31, 1999
<TABLE>
<CAPTION>
Common Stock Unrealized
Additional Acquired by Gain (loss)
Common Paid-in stock benefit Retained on AFS Treasury Total
Stock Capital plans Earnings Securities Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1996 $ - $ - $ - $ 25,874 $253 $ 26,127
Net changes in gains (losses) on
securities available-for-sale, 1,030 1,030
net of tax
Net income 1,381 1,381
------ ----- ----- ------- ------- -------
Balance September 30, 1997 $ - $ - $ - $ 27,255 $ 1,283 $28,538
Issuance of Common Stock ($.01
par value; 16,000,000
authorized shares; 6,427,350 64 64
shares issued)
Additional paid-in Capital 61,959 61,959
Unearned employee stock ownership
plan (ESOP) shares (5,142) (5,142)
ESOP shares committed to be 124 343 467
released
Net changes in gains (losses) on 1,595 1,595
securities available-for-sale,
net of tax
Net loss (47) (47)
------ ----- ----- ------- ------- -------
Balance September 30, 1998 $ 64 $ 62,083 $ (4,799) $ 27,208 $ 2,878 $ 87,434
Unearned stock awards (3,312) (3,312)
ESOP shares committed to be 32 300 332
released
Net changes in gains (losses) on
securities available-for-sale, (1,114) (1,114)
net of tax
Treasury stock at cost, (4,062) (4,062)
321,368 shares
Cash dividend paid (321) (321)
Net income 2,251 2,251
------ ----- ----- ------- ------- -------
Balance March 31, 1999 $ 64 $ 62,115 $ (7,811) $ 29,138 $ 1,764 $ (4,062) $ 81,208
==== ======== ========= ======== ======= ========= ========
</TABLE>
-6-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 1999 and 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Operating Activities:
Net Income (loss) $ 2,251 ($ 1,934)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (Recovery) for REO loss 10 (53)
Provision for loan losses 183 487
Depreciation 398 292
Deferred income tax (benefit) provision 141 (1,979)
Funding of First Federal Charitable Foundation - 4,761
ESOP expense 332 -
Amortization and accretion on:
Held-to-maturity securities 28 18
Available-for-sale securities 171 56
Amortization of deferred loan fees (230) (136)
(Gain) loss on sale of:
Assets acquired through foreclosure 30 26
Loans (35) (4)
Available-for-sale securities (33) (8)
Gain (loss) on disposal of property and equipment 1 (2)
Changes in assets and liabilities:
Increase in accrued interest receivable (5) (668)
Increase in other assets (94) (172)
Decrease in accrued interest payable (66) (141)
Increase (decrease) in accrued income taxes payable (467) 620
Increase in other liabilities 651 503
--- ---
Net cash provided by operating activities 3,266 1,666
Investing Activities:
Net increase in loans (36,344) (8,560)
Proceeds from sale of:
Available-for-sale securities 5,769 -
Assets acquired through foreclosure 116 226
Loans 6,601 2,098
Proceeds from repayments of held-to-maturity securities 16,953 13,038
Proceeds from repayments of available-for-sale securities 39,770 15,570
Proceeds from disposal of fixed assets 67 2
Purchase of:
Held-to-maturity securities (13,558) (31,118)
Available-for-sale securities (55,728) (40,662)
Office properties and equipment (782) (637)
Federal Home Loan Bank stock (1,075) (697)
------- -----
Net cash used in investing activities (38,211) (50,740)
Financing Activities:
Net increase (decrease) in deposit accounts 20,509 (2,463)
Net increase (decrease) in Federal Home Loan Bank short-term advances 6,500 (5,000)
Borrowings of Federal Home Loan Bank long-term advances 15,000 25,000
Repayments of Federal Home Loan Bank long-term advances (9) (9)
Net increase in advances from borrowers for taxes and insurance 320 524
</TABLE>
-7-
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 1999 and 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
March 31,
1999 1998
(unaudited)
<S> <C> <C>
Net increase (decrease) in other borrowings (547) 131
Net proceeds from issuance of common stock - 52,120
Purchase of common stock for stock incentive plan (3,312) -
Purchase of treasury stock (4,062) -
Cash dividend on common stock (321) -
----- ----------
Net cash provided by financing activities 34,078 70,303
Increase (decrease) in cash and cash equivalents (867) 21,229
Cash and cash equivalents, beginning of year 3,053 13,214
----- ------
Cash and cash equivalents, end of year $ 2,186 $ 34,443
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,346 $ 7,562
======= =======
Income taxes $ 947 $ 250
===== =====
Net change in unrealized gains (losses) on securities
Available-for-sale, net of tax $ (1,114) $ 489
========= =====
Supplemental disclosure - non-cash information:
Transfer from loans to real estate owned $ 94 $44
==== ===
ESOP shares committed to be released $ 300 $ -
===== ====
</TABLE>
-8-
<PAGE>
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statements Presentation
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all
normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial statements, have
been included. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in
the Company's Annual Report for the period ended September 30, 1998.
The results for the six months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended
September 30, 1999.
Business
Northeast Pennsylvania Financial Corp. (the "Company") is the holding
company for First Federal Bank. The Company's principal subsidiary,
First Federal Bank, serves the greater Hazleton area, Mountaintop,
Bloomsburg, Lehighton, and all of Schuylkill County, through ten office
locations. The Bank provides a wide range of banking services to
individual and corporate customers. The Company is subject to
competition from other financial institutions and other companies that
provide financial services. The Company is subject to the regulations
of certain federal agencies and undergoes periodic examinations by
those regulatory authorities.
Principles of Consolidation and Presentation
The accompanying financial statements of the Company include the
accounts of FIDACO, Inc., Abstractors, Inc., and First Federal Bank.
First Federal Bank and Abstractors, Inc. are wholly-owned subsidiaries
of Northeast Pennsylvania Financial Corp. FIDACO, Inc. is an inactive
subsidiary of First Federal Bank with the only major asset being an
investment in Hazleton Community Development Corporation. Abstractors,
Inc. is a title insurance agency. All material inter-company balances
and transactions have been eliminated in consolidation. Prior period
amounts are reclassified, when necessary, to conform with the current
year's presentation.
Earnings per Share
Earnings per share, basic and diluted, were $0.19 for the three months
ended March 31, 1999 and $0.39 and $0.38, respectively, for the six
months ended March 31, 1999. Due to the Bank's recent conversion and
formation of the Company, earnings per share figures for prior year
periods are not applicable.
-9-
<PAGE>
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net Income $ 2,251 -
======= ========
Basic:
Weighted average shares outstanding 6,427,350 -
Less: Unallocated/unearned shares held by stock
benefit plans (685,113) -
Less: Weighted Treasury shares (79,828)
Plus: ESOP shares released
or committed to be released 50,348 -
------ --------
5,712,757 -
========= =======
Earnings per share - basic $0.39 N/A
===== ===
March 31, 1999 March 31, 1998
-------------- --------------
Diluted:
Net Income $2,251 -
====== ========
Basic weighted shares outstanding 5,712,757
Dilutive Instruments:
Dilutive effect of stock awards 243,468 -
------- --------
5,956,225 -
========= =========
Earnings per share - diluted $0.38 N/A
===== ===
</TABLE>
2. Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. Management has not yet
determined the impact, if any, of this statement on the Company. This
statement requires changes in disclosures and would not affect the
financial condition or operating results of the Company.
-10-
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Post Retirement Benefits." This Statement
revises employers' disclosures about pension and other post-retirement
benefit plans. It does not change the measurement or recognition of
those plans. It standardizes the disclosure requirements for pensions
and other post-retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful as they were
when "FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Post-retirement Benefits Other Than
Pensions," were issued. This statement requires changes in disclosures
and would not affect the financial condition or operating results of
the Company. This Statement is effective for the fiscal years beginning
after December 15, 1997.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated
as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of certain foreign currency exposures. This
Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier adoption is permitted. The
Company adopted SFAS 133 in its fiscal fourth quarter of 1998,
including its provision for the reclassification of investments,
resulting in a $56.2 million transfer of securities from
held-to-maturity to available-for-sale.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This
Statement requires that after the securitization of a mortgage loan
held for sale, an entity engaged in mortgage banking activities
classify any retained mortgage-backed securities based on the ability
and intent to sell or hold those investments, except that a mortgage
banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first
fiscal quarter beginning after December 15, 1998 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.
-11-
<PAGE>
3. Conversion to Stock Form of Ownership
The Company is a business corporation formed at the direction of the
Bank under the laws of Delaware on December 16, 1997. On March 31,
1998: (i) the Bank converted from a federally chartered mutual savings
and loan association to a federally chartered stock savings bank; (ii)
the Bank issued all of its outstanding capital stock to the Company;
and (iii) the Company consummated its initial public offering of common
stock, par value $.01 per share (the "Common Stock"), by selling at a
price of $10.00 per share, 5,437,062 shares of Common Stock to certain
eligible account holders of the Bank who had subscribed for such shares
(collectively, the "Conversion"), by selling 514,188 shares to the
Bank's Employee Stock Ownership Plan and related trust ("ESOP"), and by
contributing 476,100 shares of Common Stock to The First Federal
Charitable Foundation (the "Foundation"), a charitable foundation,
dedicated to the communities served by the Bank. The common stock
contributed by the Company to the Foundation at a value of $4.8 million
was charged to expense. The Conversion resulted in net proceeds of
$52.1 million, after expenses of $2.2 million. Net proceeds of $25
million were invested in the Bank to increase the Bank's tangible
capital to 13.3% of the Bank's total adjusted assets.
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 $28.5 million at March 31, 1998.
The Company may not declare nor pay dividends on its stock if such
declaration and payment would violate statutory or regulatory
requirements.
In addition to the 16,000,000 authorized shares of common stock, the
Company authorized 2,000,000 shares of preferred stock with a par value
of $0.01 per share (the "Preferred Stock"). The Board of Directors is
authorized, subject to any limitations by law, to provide for the
issuance of the shares of preferred stock in series, to establish from
time to time the number of shares to be included in each such series,
and to fix the designation, powers, preferences, and rights of the
shares of each such series and any qualifications, limitations or
restriction thereof. As of March 31, 1999, there were no shares of
preferred stock issued.
-12-
<PAGE>
<TABLE>
<CAPTION>
4. Loans
Loans are summarized as follows: March 31, September 30,
1999 1998
(unaudited)
---------- -------------
<S> <C> <C>
Real Estate loans:
One-to four-family $ 176,491 $ 176,924
Multiple family and commercial 23,794 11,938
Construction 2,478 3,759
----- -----
Total real estate loans 202,763 192,621
------- -------
Consumer Loans:
Home equity loans and lines of credit 66,246 52,244
Automobile 24,662 24,589
Education 2,754 2,351
Unsecured lines of credit 1,657 1,589
Other 3,123 3,423
----- -----
Total consumer loans 98,442 84,196
------ ------
Commercial loans 15,253 9,742
------ -----
Total loans 316,458 286,559
------- -------
Less:
Allowance for loan losses (2,402) (2,273)
Deferred loan origination fees (1,619) (1,580)
------- -------
Total loans, net $ 312,437 $282,706
========= ========
</TABLE>
<TABLE>
<CAPTION>
For the six For the six
months ended For the year ended months ended
March 31, 1999 September 30, 1998 March 31, 1998
-------------- ------------------ --------------
<S> <C> <C> <C>
Balance, beginning of period $ 2,273 $ 1,272 $ 1,272
Charge-offs (56) (76) (27)
Recoveries 2 18 2
Provision for loan losses 183 1,059 487
--- ----- ---
Balance, end of period $ 2,402 $ 2,273 $ 1,734
======= ======= =======
</TABLE>
5. Deposits
Deposits consist of the following major classifications (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 September 30, 1998
-------------- ------------------
Percent Percent
Amount of Total Amount of Total
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) $ 69,951 20.3% $ 69,956 21.6%
Money market accounts 19,676 5.7% 16,368 5.0%
Certificates of deposit less than $100,000 170,801 49.6% 159,918 49.4%
Certificates of deposit greater than $100,000(1) 41,188 12.0% 36,150 11.2%
NOW Accounts 30,708 8.9% 31,182 9.6%
Non-interest bearing deposits 12,190 3.5% 10,431 3.2%
------ ---- ------ ----
Total deposits at end of period $344,514 100.0% $324,005 100.0%
======== ====== ======== ======
<FN>
(1) Deposit balances in excess of $100,000 are not federally insured.
</FN>
</TABLE>
-13-
<PAGE>
Item 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical information, this 10-Q may include certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, avoidance of any adverse effect as a result of the Year 2000 issue,
and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
Further description of the risks and uncertainties to the business are included
in detail in Section B, Management Strategy; Section C, Management of Interest
Rate Risk and Market Risk Analysis; and Section G, Liquidity and Capital
Resources.
A. General
The Company is the holding company for First Federal Bank (the "Bank"), a
federally chartered capital stock savings bank regulated by the Office of Thrift
Supervision ("OTS"). The Bank's results of operations are dependent primarily on
net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan and security sales, service charges and
other fee income, and non-interest expense. The Bank's non-interest expense
principally consists of compensation and employee benefits, office occupancy and
equipment expense, professional fees, federal deposit insurance premiums, data
processing, and advertising and business promotion expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
B. Management Strategy
Since fiscal year 1993, the Bank's operating strategy has been that of a
community-based bank, offering a wide variety of savings products to its retail
customers, while concentrating on residential and construction lending and, to a
lesser extent, consumer lending and small business and municipal commercial
lending. In order to promote long-term financial strength and profitability, the
Bank's operating strategy has focused on: (i) maintaining strong asset quality
by originating one-to four-family loans in its market area; (ii) increasing
profitability by emphasizing higher yielding consumer and commercial loans;
(iii) managing its interest rate risk by emphasizing shorter-term, fixed-rate,
one-to four-family loans, in addition to consumer and commercial loans; limiting
its retention of newly-originated longer-term fixed-rate one-to four-family
loans; soliciting longer-term deposits; utilizing longer-term advances from the
Federal Home Loan Bank of Pittsburgh ("FHLB"); and investing in investment and
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.
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<PAGE>
The Bank has attempted to diversify and expand its loan products to better serve
its customer base by placing a greater emphasis on consumer lending and
commercial lending, primarily to small businesses and municipalities.
Additionally, the Bank has entered into an agreement to sell approximately $21.0
million of fixed rate long term mortgages, borrowing approximately $9.0 million
from the Federal Home Loan Bank of Pittsburgh and purchasing approximately $30.0
million of adjustable rate mortgages, ("ARMS") including 3/1, 5/1 and 7/1 ARMS.
The Company at the same time is committed to selling $10.0 million of investment
securities which have low yielding coupons and will be purchasing $10.0 million
in higher yielding investments. The expected result of these transactions is to
increase income for the current quarter and have a slightly positive impact on
the net interest margin. From an interest rate risk perspective the Bank will
have reduced its interest rate risk while continuing to maintain its level of
profitability. The Bank is also evaluating the offering of loan products which
it has historically not offered, such as nonconforming or subprime one-to
four-family loans. In the event the Bank originates such loan products, it
currently intends to hold such loans in its portfolio.
C. Management of Interest Rate Risk and Market Risk Analysis
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates. The Board of Directors has
established an Asset Liability Committee ("ALCO"), which is responsible for
reviewing the Bank's asset/liability policies and interest rate risk position.
The ALCO meets on a quarterly basis and reports trends and interest rate risk
position to the Finance Committee of the Board of Directors. It then reviews
with them its activities and strategies, the effect of those strategies on the
Bank's net interest margin, the market value of the portfolio, and the effect
the changes in interest rates will have on the Bank's portfolio and exposure
limits. The extent of the movement of interest rates is an uncertainty that
could have a negative impact on the earnings of the Bank.
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (i) emphasizing the origination and retention of fixed-rate
mortgages having terms of maturity of not more than fifteen years,
adjustable-rate and shorter-term loans, commercial loans and consumer loans;
(ii) limiting the origination of all greater than 15-year fixed-rate mortgage
loans to no more than 25% of the total originations in a given year; (iii)
selling, in the secondary market, fixed-rate mortgage loans with terms greater
than 15 years, while retaining the servicing rights, and; (iv) investing in
shorter-term and, to a lesser extent, adjustable-rate securities which generally
bear lower yields, compared to longer-term investments, but which better
position the Bank for increases in market interest rates.
Management believes that reducing its exposure to interest rate risk
fluctuations will enhance long-term profitability. However, the Bank's
strategies may adversely impact net interest income due to lower initial yields
on some of these investments in comparison to longer-term fixed-rate investments
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<PAGE>
and whole loans. To promote a higher yield on its investment securities while at
the same time addressing the Bank's interest rate risk management policies, the
Bank has invested a significant portion of its portfolio of investment
securities in longer-term (more than five years) federal agency obligations
which have call features. Given the rates of such securities in comparison to
current market interest rates, the Bank anticipates the substantial majority of
such securities will be called prior to their contractual maturity. However, if
changes in interest rates exceed ranges anticipated by the Bank in estimating
the anticipated life of such callable securities, the Bank would be subject to
increased interest rate or reinvestment risk, depending on the direction of the
change in market interest rates.
D. Gap Analysis.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within a period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a negative gap position would be in a worse position to invest
in higher yielding assets as compared to an institution with a positive gap
position which, consequently, may result in the cost of its interest-bearing
liabilities increasing at a rate faster than its yield on interest-earning
assets than if it had a positive gap. During a period of falling interest rates,
an institution with a negative gap position would tend to have its
interest-bearing liabilities repricing downward at a faster rate than its
interest-earning assets as compared to an institution with a positive gap which,
consequently, may tend to positively affect the growth of its net interest
income. At March 31, 1999, the Bank's cumulative one year gap was a negative
11.9% of total assets compared to a negative 7.8% at September 30, 1998.
September's interest rate sensitivity gap reflects the impact of the Bank
prefunding investments which it had determined had a high likelihood of being
called in the first fiscal quarter of 1999. These investments were funded with
short term FHLB advances which were repaid in subsequent quarter with proceeds
of called securities. March's interest rate sensitivity gap reflects the initial
impact of a $45.0 million restructuring transaction undertaken by the Company.
This restructuring transaction includes the sale, from the Bank, of
approximately $21.0 million of fixed rate long term mortgages, borrowing
approximately $14.0 million from the Federal Home Loan Bank of Pittsburgh and
the subsequent purchase of approximately $20.0 million of adjustable rate
mortgages and mortgage-backed securities, $10.0 million of fixed rate home
equity loans, and $5.0 million of fixed rate long term investment securities. In
addition, this transaction includes the sale of $10.0 million of investment
securities that have low yielding coupons from the Company and the purchase of
$10.0 million in higher yielding investments. This restructuring transaction
began in March with the purchase of approximately $10.0 million of fixed rate
home equity loans from another financial institution and the purchase of $4.0
million of the fixed rate long-term investment securities that were funded with
short-term FHLB advances. The remainder of the transaction will be executed in
the third quarter. The short-term FHLB borrowings were replaced with a $15.0
million long-term advance in the month of April.
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Certain shortcomings are inherent in gap analysis. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate loans, generally have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of changes in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from prior projections.
Finally, the ability of many borrowers to service their adjustable-rate loans
may decrease in the event of an interest rate increase.
E. Net Portfolio Value
The Bank's interest rate sensitivity is primarily monitored by management
through the use of a model which estimates the change in the Bank's net
portfolio value ("NPV") over a range of interest rate scenarios. Such analyses
are prepared by a third party for the Bank. NPV is the present value of expected
cash flows from assets, liabilities, and off-balance sheet contracts. The NPV
ratio, under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The model 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 may vary
from the Bank's model primarily due to differences in assumptions utilized,
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. The following table sets forth the Bank's NPV as of March 31, 1999.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Net PortfolioValue Value of Assets
Interest Rates --------------------------------------------------------- -------------------------------------
In Basis Points NPV
(Rate Shock) Amount $ Change % Change Ratio Change (1)
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
300 27,870 (36,153) (56.47%) 5.60% (621)
200 41,339 (22,684) (35.43%) 8.05% (376)
100 53,872 (10,151) (15.86%) 10.19% (162)
Static 64,023 0 0.00% 11.81% 0
-100 70,915 6,893 10.77% 12.82% 101
-200 74,194 10,171 15.89% 13.19% 138
-300 77,217 13,195 20.61% 13.51% 170
<FN>
(1) Expressed in basis points
</FN>
</TABLE>
As is the case with gap analysis, certain shortcomings are inherent in the
methodology used in the NPV interest rate risk measurements. Modeling changes in
NPV requires the making of certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, NPV assumes that the composition of the Bank's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
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change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, NPV measurements provide an indication of the Bank's
interest rate risk exposure at a particular point in time. Such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual results.
F. Non-Performing Assets
The following table presents information regarding the Bank's
non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
---- ----
<S> <C> <C>
Non-performing loans:
Non-accrual loans $ 915 $ 1,239
Real estate owned and other repossessed assets 50 112
-- ---
Total non-performing assets $ 965 $ 1,351
===== =======
Total non-performing loans as a percentage of total loans 0.29% 0.44%
Total non-performing assets as a percentage of total assets 0.17% 0.26%
</TABLE>
G. Liquidity and Capital Resources
The Bank's primary sources of funds on a long and short-term basis are deposits,
principal and interest payments on loans, mortgage-backed and investment
securities, and FHLB advances. The Bank uses the funds generated to support its
lending and investment activities as well as any other demands for liquidity
such as deposit outflows. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows, mortgage prepayments and the
exercise of call features are greatly influenced by general interest rates,
economic conditions and competition. The Bank has continued to maintain the
required levels of liquid assets as defined by OTS regulations. This requirement
of the OTS, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings. The Bank's current required liquidity ratio is 4.0%.
At March 31, 1999 and 1998, the Bank's liquidity ratios were 10.6% and 22.3%,
respectively.
At March 31, 1999, the Bank exceeded all of its regulatory capital requirements
with a tangible capital level of $57.1 million, or 10.7%, of total adjusted
assets, which is above the required level of $8.0 million, or 1.5%; a core
capital level of $57.1 million or 10.7% of total adjusted assets, which is above
the required level of $16.0 million, or 3.0%; and a risk-based capital of $59.5
million or 23.6% of risk-weighted assets, which is above the required level of
$20.2 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 March 31, 1999, cash and cash equivalents
and investment and mortgage-related securities available-for-sale totaled $200.1
million, or 35.9%, of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At March 31, 1999, the Bank had $128.0 million in
advances outstanding from the FHLB, and had an additional overall borrowing
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capacity from the FHLB of $241.2 million. Depending on market conditions, the
pricing of deposit products and FHLB advances, the Bank may continue to rely on
FHLB borrowings to fund asset growth.
At March 31, 1999, the Bank had commitments to originate and purchase loans and
unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $31.5 million. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificate accounts,
including Individual Retirement Account ("IRA") accounts, which are scheduled to
mature in less than one year from March 31, 1999, totaled $162.7 million. The
Bank expects that substantially all of the maturing certificate accounts, with
the exception of jumbo certificates of deposit, will be retained by the Bank at
maturity. At March 31, 1999, the Bank had $32.0 million in jumbo certificates
which will be evaluated at maturity.
To improve its customer delivery systems and expand its services, the Bank has
been investing in new computer hardware and software and in January 1999
relocated its Columbia Mall branch to a new location in Scott Township. The Bank
anticipates that during fiscal 1998 and 1999, it will have incurred capital
expenditures of approximately $2.4 million to fund such plans. These anticipated
capital expenditures will be funded from the Bank's general corporate funds,
including proceeds from the Conversion and its FHLB advances. In addition, in
March 1999, the Bank signed an agreement to purchase the assets and liabilities
of the Danville branch of Omega Bank. This will be the eleventh branch office
for First Federal Bank and the first office in Montour County.
Management is currently evaluating further expansion.
The initial impact of the Conversion on the liquidity and capital resources of
the Bank was significant as it substantially increased the liquid assets of the
Bank and the capital base on which the Bank operates. Additionally, the Bank
invested the substantial majority of its conversion proceeds in readily
marketable investment grade securities which, if liquidity needs developed,
could be sold by the Bank to provide additional liquidity. At March 31, 1999,
the Bank had total equity, determined in accordance with generally accepted
accounting principles, of $58.8 million, or 11.0%, of total assets, which
approximated the Bank's regulatory tangible capital at that date of 10.7% of
assets. An institution with a ratio of tangible capital to total assets of
greater than or equal to 5% is considered to be "well-capitalized" pursuant to
OTS regulations.
H. Year 2000 Disclosure
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Company of the Year 2000 issue could
materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
As the year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Year 2000 issues result from the inability of many computer
programs or computerized equipment to accurately calculate, store or use a date
after December 31, 1999. The erroneous date can be interpreted in a number of
different ways, the most common being Year 2000 represented as the year 1900.
Correctly identifying and processing Year 2000 as a leap year may also be an
issue. These misinterpretations of various dates in the Year 2000 could result
in a system failure or miscalculations causing disruptions of normal business
operation including, among other things, a temporary inability to process
transactions, track important customer account information, or provide
convenient access to this information.
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<PAGE>
The Bank is subject to the regulation and oversight of various banking
regulators, which requires complying with specific timetables, programs and
guidance regarding Year 2000 issues. Regulatory examination of the Bank's Year
2000 programs are conducted on a periodic basis and reports are submitted by the
Bank to the banking regulators on a periodic basis. In addition, reports are
currently provided on a monthly basis to the Board of Directors.
Company State of Readiness. The Company has completed an assessment of its
financial and operational software systems in accordance with the various
regulatory agency guidance documents. The Company 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 was
compliant. The Company has successfully completed testing its mission critical
systems. The Company is also upgrading personal computers to meet both system
and Year 2000 requirements. In connection with the Company's assessment, a
number of the less significant third party vendors advised the Company that
their software is Year 2000 compliant, and the Company has fully tested that
software.
The Company has communicated with all of its significant vendors, suppliers and
large commercial customers to determine the extent to which the Company is
vulnerable to those third-parties' failure to remedy their own Year 2000
problems. In the event that any of them do not successfully achieve Year 2000
compliance in a timely manner, the Company's business or operations could be
adversely affected. If significant suppliers fail to meet Year 2000 operating
requirements, the Company intends to engage alternative suppliers. For
insignificant vendors, the Company will not necessarily validate that they are
Year 2000 compliant. No insignificant vendor has responded that they will not be
compliant by March 1999. The Bank has surveyed its large commercial customers as
to their Y2K preparedness. Respondents have acknowledged their awareness of Y2K
issues and currently believe that these issues will not materially affect their
financial condition, liquidity, or results of operations. The extent to which
customers are Y2K compliant is considered in the Bank's decision to extend
credit.
Contingency Plan. The Company is in the process of obtaining back-up service
providers and assessing the potential adverse risks to the Company. The
Company's contingency plans involve the use of manual labor to compensate for
the loss of certain automated computer systems and inconveniences caused by
disruption in command systems.
A contingency plan will be developed by June 30, 1999 for mission-critical and
required mainframe and PC based applications, third-party relationships,
environmental systems, proprietary programs and non-computer related systems.
This contingency plan will identify scheduled completion dates, test dates and
trigger dates.
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<PAGE>
Business continuation plans for critical business applications are in place.
These plans include adequate staffing on site during the Year 2000 date change
to quickly repair any errant applications. In addition, in the event of any
problems the Company would follow its current computer outage business
continuation plans until such problems are corrected.
Cost of Year 2000. Over the past several years, the Company's Technology Plan
has called for an aggressive schedule for installing new systems or upgrading
old systems in order to build a technology infrastructure which will allow the
Company to offer competitive products and improve customer services while
providing for internal efficiencies. The technology improvements as part of the
Technology Plan have allowed the Company to avoid specific costly Year 2000
issues. The Company estimates its expenditures specifically associated with Year
2000 will be $75,000 during the fiscal year ending September 1999.
The Company believes that the costs or the consequences of incomplete or
untimely resolution of its Year 2000 issues do not represent a known material
event or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition. However,
if compliance is not achieved in a timely manner by the Company or any of its
significant related third-parties, be it a supplier of services or a customer,
the Y2K issue could possibly have a material effect on the Company's operations
and financial position.
The cost of the projects and the date on which the Company plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which are derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Risks of Year 2000. The Year 2000 issue presents potential risks of uncertain
magnitude. The risks arise both with regard to systems purchased by the Company
through third party vendors as well as those outside the control of the Company,
such as with ATM networks or credit card processors. These failures may cause
delays in the ability of customers to access their funds through automated
teller machines, point of sale terminals at retail locations, or other shared
networks. The Year 2000 issue also poses the potential risk for business
disruption due to a mission critical software system failure, which could result
in inaccurate interest payment calculations, credit transactions, or
record-keeping. The Company and the OTS are closely monitoring the progress of
the Company's major third party vendors and, to date, the Company is satisfied
with their progress. However, if the Company, its customers, or vendors are
unable to resolve Year 2000 issues in a timely manner, it could result in a
material financial risk.
I. Comparison of Financial Condition at March 31, 1999 and September 30, 1998
Total assets increased $35.7 million, from $522.2 million at September 30, 1998
to $557.9 million at March 31, 1999. The growth in assets was primarily due to
increases in loans receivable and investment securities, offset by a decrease in
cash and cash equivalents.
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<PAGE>
Cash and cash equivalents decreased $867,000 to $2.2 million at March 31, 1999,
from $3.0 million at September 30, 1998 due to the purchase of approximately
$15.0 million in loans, increased loan originations, security purchases, and the
repurchase of the Company's common stock, offset by the increase in FHLB
advances and deposits.
Securities available-for-sale increased $9.3 million, or 4.9%, from $189.1
million at September 30, 1998 to $198.4 million at March 31, 1999, while
securities classified as held-to-maturity decreased $3.4 million, or 10.8%, to
$28.3 million at March 31, 1999. These changes were primarily attributable to
the increased security purchases, net of called securities.
Loans increased $29.7 million to $312.4 million at March 31, 1999. This was
primarily due to a $14.9 million increase in home equity loans resulting from 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 real estate loans increased $11.9 million, and other
commercial loans increased $5.5 million due to marketing efforts and competitive
pricing of such products.
Prepaid expenses and other assets increased $649,000, or 22.5%, to $3.5 million
at March 31, 1999. This change was primarily due to an increase in the deferred
income tax benefit resulting from a decline in unrealized gain/loss on
available-for-sale securities.
Total deposits increased $20.5 million to $344.5 million at March 31, 1999. This
increase in deposits was primarily due to a $15.9 million increase in
certificates of deposit from $196.1 million at September 30, 1998 to $212.0
million at March 31, 1999, as a result of increased marketing efforts and
competitive pricing of such products. Also contributing to this change were
increases in money market accounts of $3.3 million and non-interest bearing
demand accounts of $1.7 million, resulting from a more active solicitation of
such accounts.
FHLB advances increased $21.5 million from $106.5 million at September 30, 1998
to $128.0 million at March 31, 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 can be invested at yields higher than the
cost of the borrowed funds thereby increasing net interest income.
Total equity decreased $6.2 million to $81.2 million at March 31, 1999. This
decrease in equity resulted primarily from the repurchase of the Company's
common stock, at a cost of $4.1 million, along with a $3.3 million acquisition
of stock for stock benefit plans. These decreases were offset by operating
results for the period resulting in a net increase of $1.9 million in retained
earnings.
J. Comparison of Operating Results for the Three Months ended March 31, 1999
and March 31, 1998
General. The Company had net income of $1.1 million for the three months ended
March 31, 1999, compared to a net loss of $2.5 million for the three months
ended March 31, 1998, an increase of $3.6 million. This increase in income is
primarily due to increases in net interest income and non-interest income offset
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by an increase in the provision for income taxes. The loss in the prior year
period was primarily due to a one-time $4.8 million non-recurring pre-tax ($3.1
million after-tax) expense related to the charitable contribution made to First
Federal Charitable Foundation ("the Foundation") in connection with the
Conversion. The Company's core net earnings (quarterly earnings excluding the
after-tax impact of the non-recurring contribution) were $651,000 for the
quarter ended March 31, 1998.
Interest Income. Total interest income increased by $1.9 million, or 26.2%, from
$7.1 million for the three months ended March 31, 1998 to $9.0 million for the
three months ended March 31, 1999. This was primarily due to a $129.3 million,
or 33.2%, increase in the average balance of interest earning assets, offset by
a slight decrease in the weighted average yield on interest earning assets.
Specifically interest income on securities increased $1.3 million, or 70.8%,
from $1.9 million to $3.2 million for the three months ended March 31, 1998 and
March 31, 1999, respectively, primarily due to a $99.4 million increase in the
average balance of such securities.
Also, interest income on loans increased $547,000, or 10.4%. This was primarily
due to the increase of interest income on consumer loans of $443,000 from $1.3
million for the period ending March 31, 1998 to $1.8 million primarily due to a
$23.1 million increase in the average balance of these loans. Interest income on
commercial loans also increased $181,000, or 49.2%, to $550,000 for the three
months ended March 31, 1999, as a result of a $2.7 million, or 23.3%, increase
in the average balance of such loans.
Interest Expense. Interest expense increased $931,000, or 25.1%, from $3.7
million to $4.6 million for the three months ended March 31, 1998 and March 31,
1999, respectively. The increase in interest expense was primarily the result of
a $58.7 million increase in the average balance of FHLB advances and other
borrowings, which increased from $47.1 million at March 31, 1998 to $105.7
million at March 31, 1999, offset by a twenty-four basis point decrease in the
weighted average rate paid on such borrowings from 5.42% to 5.18% for the three
months ended March 31, 1998 and March 31, 1999, respectively. The increase in
FHLB advances reflects management's determination to more heavily utilize FHLB
advances to fund asset growth. The increase in interest expense also resulted
from increased interest expense on certificates of deposit, which was the result
of a $25.1 million increase in the average balance of certificates of deposit.
Provision for Loan Losses. The Bank's provision for loan losses for the three
months ended March 31, 1999 was $135,000 compared to $219,000 for the three
months ended March 31, 1998. The allowance for loan losses is maintained at a
level that management considers adequate to provide for estimated losses based
upon an evaluation of known and inherent risks in the loan portfolio.
Management's evaluation is based upon, among other things, delinquency trends,
the volume of non-performing loans, prior loss experience of the portfolio,
current economic conditions, and other relevant factors. Although management
believes it has used the best information available to it in making such
determinations, and that the allowance for loan losses is adequate, future
adjustments to the allowance may be necessary, and net income may be adversely
affected if circumstances differ substantially from the assumptions used in
determining the level of the allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for losses on loans. Such agencies may require the
Company to recognize additions to the allowance based on their judgements about
information available to them at the time of their examination. The allowance is
increased by the provision for loan losses which is charged to operations. Loan
losses, other than those incurred on loans held for sale, are charged directly
against the allowance and recoveries on previously charged-off loans are
generally added to the allowance.
-23-
<PAGE>
Non-interest Income. Non-interest income increased $194,000, from $174,000 to
$368,000, for the three months ended March 31, 1998 and March 31, 1999,
respectively. The increase in non-interest income was primarily due to a $78,000
increase in insurance premium income from closings performed by the Company's
title insurance subsidiary. Other income increased $74,000 from $23,000 to
$97,000 for the three months ended March 31, 1998 and 1999, respectively due to
rental income and an increase in the cash surrender value of Directors' and
Officers' life insurance policies. Contributing to the increase in non-interest
income was a $41,000, or 27.0%, increase in service charges and other fees
resulting from increased customer activity on the various deposit and loan
accounts.
Non-interest Expense. Total non-interest expense decreased from $7.2 million to
$3.2 million for the three months ended March 31, 1998 and March 31, 1999,
respectively, due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation in the prior period. This decrease was
offset by increases in compensation and employee benefits of $385,000, or 26.4%,
to $1.8 million for the three months ended March 31, 1999, primarily due to the
expense of the ESOP and stock award programs. Other non-interest expense
increased $134,000, or 43.6%, primarily due to increased marketing efforts of
deposit and loan products, an increase in the provision for loss on REO, and an
increase in overall operating expenses. Professional fees increased $131,000 due
to increased legal and accounting fees associated with being a public company.
Income Taxes. The Company had an income tax provision of $255,000 for the three
months ended March 31, 1999, compared to a benefit of $1.4 million for the three
months ended March 31, 1998 resulting in effective tax rates of 19.2%, and
(35.7%), for the three months ended March 31, 1999, and March 31, 1998,
respectively. The increase in income tax expense was attributable to the
increase in income before taxes. The decline in the effective tax rate, below
the statutory rate, was the result of increased tax-free security purchases.
K. Comparison of Operating Results for the Six Months ended March 31, 1999
and March 31, 1998.
General. For the six months ended March 31, 1999, the Company reported a net
profit of $2.3 million, compared to a $1.9 million net loss for the same period
in 1998. The loss at March 31, 1998 relates to the one-time $4.8 million
non-recurring pre-tax ($3.1 million after-tax) expense relating to the funding
of the Foundation in connection with the Conversion. The Company's core net
earnings (earnings excluding the after-tax impact of the non-recurring
contribution) were $1.2 million for the six months ended March 31, 1998.
Interest Income. Total interest income increased $3.9 million, or 27.9%, from
$14.0 million to $17.9 million for the six months ended March 31, 1998 and March
31, 1999, respectively, primarily due to a $132.6 million, or 34.9%, increase in
the average balance of interest earning assets, offset by a slight decrease in
the weighted average yield on interest earning assets. This increase was
primarily due to a $2.9 million, or 82.6%, increase in interest income on
securities, to $6.4 million for the six months ended March 31, 1999, primarily
due to a $107.5 million increase in the average balance of such securities.
-24-
<PAGE>
Interest income on loans also increased $1.0 million, or 9.7%, to $11.5 million
for the six months ended March 31, 1999, primarily due to the increase in
interest income on consumer loans of $938,000, or 35.0%, to $3.6 million at
March 31, 1999, due to a $22.7 million increase in the average balance of
consumer loans from $62.9 million at March 31, 1998 to $85.6 million at March
31, 1999. This increase relates to increased marketing effort and competitive
pricing of these loans. Interest income on commercial loans increased $305,000,
or 50.1%, from $609,000 at March 31, 1998 to $914,000 at March 31, 1999.
Interest Expense. Interest expense increased $1.9 million, or 25.1%, from $7.4
million to $9.3 million for the six months ended March 31, 1998 and March 31,
1999, respectively. The increase in interest expense was primarily the result of
a $62.4 million increase in the average balance of FHLB advances, which
increased from $40.4 million at March 31, 1998 to $102.8 million at March 31,
1999, offset by a slight decrease in the weighted average rate paid on such
borrowings from 5.49% at March 31, 1998 to 5.21% at March 31, 1999. The increase
in FHLB advances reflects management's determination to more heavily utilize
FHLB advances to fund asset growth. This increase in interest expense was also
due to an overall increase in interest expense on deposits primarily due to a
$17.2 million, or 9.1%, rise in the average balance of certificate accounts.
Provision for Loan Losses. The Bank's provision for loan losses was $183,000 for
the six months ended March 31, 1999, compared to $487,000 for the six months
ended March 31, 1998. The allowance for loan losses is maintained at a level
that management considers adequate to provide for estimated losses based upon an
evaluation of known and inherent risks in the loan portfolio. Management's
evaluation is based upon, among other things, delinquency trends, the volume of
non-performing loans, prior loss experience of the portfolio, current economic
conditions, and other relevant factors. Although management believes it has used
the best information available to it in making such determinations, and that the
allowance for loan losses is adequate, future adjustments to the allowance may
be necessary, and net income may be adversely affected if circumstances differ
substantially from the assumptions used in determining the level of the
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for
losses on loans. Such agencies may require the Company to recognize additions to
the allowance based on their judgements about information available to them at
the time of their examination. The allowance is increased by the provision for
loan losses which is charged to operations. Loan losses, other than those
incurred on loans held for sale, are charged directly against the allowance and
recoveries on previously charged-off loans are generally added to the allowance.
Non-interest income. The Company experienced a $420,000 increase in non-interest
income from $333,000 to $753,000 for the six months ended March 31, 1998 and
March 31, 1999, respectively, due primarily to an increase in other income of
$137,000 from rental income and an increase in the cash surrender value of
Officers and Directors life insurance policies. Also contributing to this
increase was a $123,000 increase in insurance premium income from closings
performed by the Company's title insurance subsidiary. Service charges and fee
income also increased $103,000 primarily due to increased customer activity on
various deposit and loan accounts.
-25-
<PAGE>
Non-interest expense. Total non-interest expense decreased from $9.5 million to
$6.3 million for the six months ended March 31, 1998 and March 31, 1999,
respectively, due primarily to a one-time $4.8 million non-recurring expense
relating to the funding of the Foundation in March 1998. This decrease was
offset by an increase in salary and benefit expense of $877,000, or 32.7%,
primarily due to the establishment of the ESOP and stock award programs.
Professional fees increased $307,000 due to an increased amount of legal and
audit fees associated with being a public company. Other non-interest expense
increased $306,000, or 52.8%, 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 is an increase in
general operating expenses, as well as an increase in the provision for REO.
Income taxes. The Company had income tax expense of $642,000 for the six months
ended March 31, 1999, compared to a benefit of $1.1 million for the six months
ended March 31, 1998, resulting in an effective tax rate of 22.2% for the six
months ended March 31, 1999. The increase in income tax expense was attributable
to the increase in income before taxes for the six months ended March 31, 1999.
-26-
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to Part I, Item 2, Sections C, D and E on
pages 15-17, inclusive.
-27-
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the
Company's financial condition or results of operation.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
2.1 Amended Plan of Conversion (including the Federal
Stock Charter and Bylaws of First Federal
Bank).*
3.1 Certificate of Incorporation of Northeast
Pennsylvania Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.*
4.0 Form of Stock Certificate of Northeast Pennsylvania
Financial Corp.*
11.0 Statement regarding Computation of Per Share
Earnings (See Notes to Consolidated
Financial Statements)
27.0 Financial Data Schedule (submitted only with filing
in electronic format)
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, and any amendments thereto, Registration
No. 333-43281.
-28-
<PAGE>
(B) Reports on Form 8-K
On January 27, 1999, the Company filed an 8-K to announce its
earnings for the first quarter and to declare a cash dividend.
The press release announcing Company's earnings and the
declaration of a cash dividend were filed by exhibit.
On March 16, 1999 the Company filed an 8-K to announce it had
completed its repurchase of 5% of its outstanding shares. The
press release announcing the completion of the stock repurchase
was filed by exhibit.
On March 22, 1999, the Company filed an 8-K to announce it had
entered into an agreement to purchase a new branch office. The
press release announcing the agreement was filed by exhibit.
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
Date: May 14, 1999 By: /s/ E. Lee Beard
----------------------------
E. Lee Beard
President and Chief Executive
Officer
Date: May 14, 1999 By: /s/ Patrick J. Owens, Jr.
--------------------------
Patrick J. Owens, Jr.
Chief Financial Officer and
Treasurer
-30-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the form 10-Q and
is qualified in its entirety by reference to the unaudited financial
statements contained herein.
</LEGEND>
<CIK> 0001050996
<NAME> Northeast Pennsylvania Financial Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-START> Oct-01-1998
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,224
<INT-BEARING-DEPOSITS> 962
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 198,410
<INVESTMENTS-CARRYING> 28,347
<INVESTMENTS-MARKET> 29,909
<LOANS> 312,437
<ALLOWANCE> 2,402
<TOTAL-ASSETS> 557,933
<DEPOSITS> 344,514
<SHORT-TERM> 32,778
<LIABILITIES-OTHER> 3,944
<LONG-TERM> 95,489
0
0
<COMMON> 64
<OTHER-SE> 81,144
<TOTAL-LIABILITIES-AND-EQUITY> 557,933
<INTEREST-LOAN> 11,548
<INTEREST-INVEST> 4,098
<INTEREST-OTHER> 2,297
<INTEREST-TOTAL> 17,943
<INTEREST-DEPOSIT> 6,610
<INTEREST-EXPENSE> 9,280
<INTEREST-INCOME-NET> 8,663
<LOAN-LOSSES> 183
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 6,340
<INCOME-PRETAX> 2,893
<INCOME-PRE-EXTRAORDINARY> 2,893
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,251
<EPS-PRIMARY> .39
<EPS-DILUTED> .38
<YIELD-ACTUAL> 7.32
<LOANS-NON> 915
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,273
<CHARGE-OFFS> (56)
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 2,402 <F1>
<ALLOWANCE-DOMESTIC> 1,937
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 465 <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>
