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>
<S> <C> <C> <C> <C> <C>
At September 30,
(in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED CONSOLIDATED FINANCIAL DATA:
Total Assets $637,342 $612,225 $522,268 $369,242 $362,464
Cash and cash equivalents 6,295 4,177 3,053 13,214 4,045
Loans, net (1) 415,105 364,190 282,706 261,469 242,916
Securities held-to-maturity:
Mortgage-related securities, net - - - 9,965 13,386
Investment securities, net 30,336 30,332 31,770 28,960 30,100
Securities available for sale:
Mortgage-related securities, net 53,076 56,333 75,651 29,982 37,259
Investment securities, net 104,398 133,502 113,443 14,791 22,899
Deposits 419,671 375,983 324,005 314,123 306,806
FHLB Advances 137,461 155,980 106,498 23,516 25,534
Total equity 72,975 75,476 87,434 28,538 26,127
Assets acquired through foreclosure 173 98 112 319 453
Non-performing assets and
troubled debt restructurings 3,672 1,469 1,351 1,205 1,169
For the Fiscal Years Ended September 30,
(in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED OPERATING DATA:
Total interest income $45,146 $37,674 $30,542 $26,599 $24,323
Interest expense 26,531 19,822 15,566 14,194 13,007
------- ------- ------- ------- -------
Net interest income 18,615 17,852 14,976 12,405 11,316
Provision for loan losses 1,467 747 1,059 651 97
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 17,148 17,105 13,917 11,754 11,219
Non-interest income:
Net gain (loss) on sale of securities 37 63 62 (563) -
Other 1,859 1,805 894(2) 430 508
Non-interest expense 14,527 13,395 15,279 9,492 10,774(3)
------- ------- ------- ------- -------
Income(loss) before income taxes 4,517 5,578 (406) 2,129 953
Income tax expense (benefit) 581 1,013 (359) 748 12
------- ------- ------- ------- -------
Net income(loss) $3,936 $4,565 ($47) $ 1,381 $ 941
======= ======= ======= ======= =======
(See footnotes on next page)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
At or for the Fiscal Years Ended September 30,
(in thousands)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED OPERATING DATA (4):
Performance Ratios:
Average yield on interest-earning assets (5) 7.53% 7.34% 7.45% 7.51% 7.48%
Average rate paid on interest-bearing
liabilities 4.80 4.36 4.35 4.31 4.29
Average interest rate spread (6) 2.73 2.98 3.10 3.20 3.19
Net interest margin (7) 3.26 3.65 3.74 3.53 3.49
Ratio of interest-earning assets to
interest-bearing liabilities 112.56 118.00 117.35 108.31 107.57
Net-interest income after provision for loan
losses to non-interest expense 118.04 127.70 91.09 123.83 104.13
Non-interest expense as a percent of
average assets 2.25 2.42 3.53 2.58 3.19
Return on average assets .61 .83 (.01) 0.38 0.28
Return on average equity 5.44 5.78 (.08) 4.98 3.60
Ratio of average equity to average assets 11.22 14.72 13.40 7.53 7.75
Common stock dividend payout ratio (diluted) 37.97 25.81 N/A N/A N/A
<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, 2000, 1999, 1998, 1997 and 1996 was $4.2
million, $2.9 million, $2.3 million, $1.3 million and $730,000, 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 are presented on a taxable equivalent basis using the combined Federal and state income tax
rate of 40%.
(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 2
<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").
The Company became the holding company for 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
has no significant assets, other than all of the outstanding shares of the Bank
and the portion of net proceeds it retained from the initial public offering,
and no significant liabilities. Management of the Company and the Bank are
substantially similar and the Company neither owns nor leases any property, but
instead uses the premises, equipment and furniture of the Bank. Accordingly, the
information set forth herein, including the consolidated financial statements
and related financial data, relates primarily to the Bank. 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 and one loan production office in Monroe
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 the 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, 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, such as title insurance, trust and
investment management services, all with improved delivery systems through
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 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
Page 3
<PAGE>
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 2000, 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 majority of such securities may not 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, 2000.
<TABLE>
<S> <C> <C> <C> <C> <C>
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)
300 $41,856 $(36,284) (46.43%) 7.09% (513)
200 54,999 (23,141) (29.61) 9.06 (317)
100 67,440 (10,700) (13.69) 10.81 (142)
Static 78,140 0 0.00 12.22 0
(100) 84,336 6,196 7.93 12.96 73
(200) 85,700 7,560 9.67 13.01 79
(300) 84,665 6,525 8.35 12.73 50
<FN>
(1) Expressed in basis points.
</FN>
</TABLE>
Page 4
<PAGE>
The following table sets forth the Company's NPV as of September 30, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C.
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)
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 5
<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, 2000, 1999 and
1998. 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. Average balances are derived from average
daily balances. The yields and costs include fees which are considered
adjustments to yields.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Fiscal Years Ended September 30,
(in thousands)
2000 1999 1998
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST-EARNING ASSETS:
Loans (1):
Real estate:
Taxable $252,129 $18,812 7.46% $201,162 $15,463 7.69% $190,264 $14,765 7.76%
Non-taxable(2) 286 29 10.09 258 24 9.30 186 19 10.22
Commercial:
Taxable 14,119 1,161 8.21 10,263 892 8.69 6,634 632 9.53
Non-taxable(2) 8,820 637 7.22 4,665 342 7.33 4,231 335 7.92
Consumer 125,541 10,797 8.60 97,014 8,079 8.33 70,423 6,018 8.55
------- ------ ----- ------- ------ ---- ------- ------ -----
Total loans 400,895 31,436 7.84 313,362 24,800 7.91 271,738 21,769 8.01
Mortgage-related securities(3) 54,749 3,683 6.73 68,359 4,190 6.13 54,928 3,362 6.12
Investment securities (4):
Taxable 104,590 7,274 6.95 85,901 5,537 6.45 59,568 3,888 6.53
Non-taxable (2) 59,173 4,515 7.63 65,472 4,740 7.24 24,179 1,772 7.33
Interest-earning deposits 2,107 (80) (3.80) 2,929 94 3.21 9,121 457 5.01
------- ------ ----- ------- ------ ---- ------- ------ -----
Total interest-earning assets 621,514 46,828 7.53 536,023 39,361 7.34 419,534 31,248 7.45
Noninterest-earning assets 23,570 16,608 12,234
------- ------- -------
Total assets $645,084 $552,631 $431,768
INTEREST-BEARING LIABILITIES:
Deposits:
Money market and NOW accounts $60,205 $1,280 2.15% $51,176 $999 1.95% $44,563 $ 789 1.77%
Savings accounts 68,095 1,463 2.15 69,546 1,464 2.11 71,102 1,607 2.26
Certificates of deposit 232,069 12,568 5.42 212,933 11,053 5.19 189,306 10,319 5.45
------- ------ ----- ------- ------ ---- ------- ------ -----
Total deposits 360,369 15,311 4.25 333,655 13,516 4.05 304,971 12,715 4.17
FHLB advances and other borrowings 191,797 11,220 5.85 120,600 6,306 5.23 52,531 2,851 5.43
------- ------ ----- ------- ------ ---- ------- ------ -----
Total interest-bearing liabilities 552,166 26,531 4.80 454,255 19,822 4.36 357,502 15,566 4.35
Non-interest-bearing liabilities 20,558 17,022 16,423
------- ------- -------
Total liabilities 572,724 471,277 373,925
Equity 72,360 81,354 57,843
------- ------- -------
Total liabilities and equity $645,084 $552,631 $431,768
======= ======= =======
Net interest-earning assets $69,348 $81,768 $62,032
Net interest income/interest ratespread(5) $20,297 2.73% $19,539 2.98% $15,682 3.10%
------ ----- ------ ---- ------ -----
Net interest margin as a percentage
of interest-earning assets (6) 3.26% 3.65% 3.74%
------ ------ ------
Ratio of interest-earning assets to
interest-bearing liabilities 112.56% 118.00% 117.35%
------- ------ -------
<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%.
(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 Freddie
Mac.
(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 6
<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>
<S> <C> <C> <C> <C> <C> <C>
Year Ended September 30,
(in thousands)
2000 vs 1999 1999 vs 1998
Increase Total Increase Increase Total Increase
(Decrease) due to (Decrease) (Decrease) due to (Decrease)
----------------- -------------- ----------------- --------------
Rate Volume Rate Volume
INTEREST-EARNING ASSETS:
Loans (1):
Real Estate:
Taxable ($439) $3,788 $3,349 ($138) $836 $698
Non Taxable (2) 2 3 5 (2) 7 5
Commercial:
Taxable (46) 315 269 (50) 310 260
Non Taxable (2) (5) 300 295 (18) 25 7
Consumer 272 2,446 2,718 (149) 2,210 2,061
----- ------ ------ ---- ----- -----
Total loans (216) 6,852 6,636 (357) 3,388 3,031
Mortgage-related securities (3) 488 (995) (507) 4 823 827
Investment securities (4):
Taxable 460 1,277 1,737 (46) 1,697 1,651
Non Taxable (2) 287 (512) (225) (21) 2,989 2,968
Interest-earning deposits (154) (20) (174) (126) (237) (363)
----- ------ ------ ---- ----- -----
Total interest-earning assets 865 6,602 7,467 (546) 8,660 8,114
----- ------ ------ ---- ----- -----
INTEREST-BEARING LIABILITIES:
Deposits:
Money Market and NOW accounts 109 172 281 86 124 210
Savings accounts 81 (82) (1) (108) (35) (143)
Certificates of deposit 493 1,022 1,515 (454) 1,188 734
FHLB advances and other borrowings 823 4,091 4,914 (100) 3,555 3,455
----- ------ ------ ---- ----- -----
Total interest-bearing liabilities 1,506 5,203 6,709 (576) 4,832 4,256
----- ------ ------ ---- ----- -----
Increase (decrease) in net interest income ($641) $1,399 $758 $30 $3,828 $3,858
===== ====== ====== ==== ===== =====
<FN>
(1) Balances are net of deferred loan origination costs, undisbursed proceeds of construction loans in process, and includes
non-performing loans.
(2) Presented on taxable equivalent basis using the combined Federal and state income tax marginal rate of 40%.
(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 FHLB of Pittsburgh and Freddie Mac.
</FN>
</TABLE>
RESULTS OF OPERATIONS
General. Net income for fiscal 2000 decreased $629,000, from net income of
$4.6 million for fiscal 1999 to $3.9 million for fiscal 2000. This decrease was
attributable to a $1.1 million increase in non-interest expense from $13.4
million at September 30, 1999 to $14.5 million at September 30, 2000, partially
offset by a $432,000 decrease in income tax expense.
The Company experienced a $4.6 million increase in net income for fiscal 1999
compared to 1998. This increase was 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 was 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.
Interest Income. Interest income increased $7.4 million, or 19.8%, to $45.1
million for fiscal 2000 from $37.7 million for fiscal 1999. This increase was
primarily attributable to a $6.5 million increase in interest income on loans.
Mortgage loan interest income increased $3.3 million due to a $51.0 million
increase in the average balance as a result of an increase in the purchase of
such loans. Interest income on consumer loans increased $2.7 million primarily
as a result of a $28.5 million increase in the average balance of these loans.
This increased volume is attributable to an increase in indirect auto loan
originations as well as continued marketing efforts and competitive pricing of
consumer loans.
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 was 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.
Page 7
<PAGE>
Interest Expense. Interest expense increased $6.7 million, or 33.8%, to
$26.5 million for fiscal 2000. This change in interest expense was primarily the
result of a $71.2 million increase in the average balance of FHLB advances and
other borrowings. Also contributing to the change in interest expense was a
$19.1 million increase in the average balance of CDs, as well as, a 23 basis
point increase in the average rate.
Interest expense increased $4.3 million, or 27.3%, to $19.8 million in fiscal
1999 compared to 1998. 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 in the past to more
heavily utilize FHLB advances to fund asset growth.
Provision for Loan Losses. Provision for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio. The
Company's provision for loan losses for fiscal 2000 was $1.5 million, compared
to $747,000 for fiscal 1999, an increase of $720,000. For fiscal 1998, the
provision was $1.1 million. The increase in the provision from 1999 to 2000 was
the result of the impairment, as of September 30, 2000, of a borrowers ability
to repay a $2.0 million commercial loan which was discovered by the Bank in
early October 2000. This commercial loan is secured by a portfolio of
NASDAQ-traded securities whose value has fluctuated greatly in recent periods.
The 1998 to 1999 change in the provision for loan losses was due to the
continued strong performance in the loan portfolio.
Non-interest Income. The Company's non-interest income has remained
relatively unchanged in total from fiscal 1999 to fiscal 2000. Service charges
and other fee income increased $365,000 due to continued increases in customer
activity on deposit and loan accounts, as well as increased ATM activity.
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 sale 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.
Non-interest Expense. Total non-interest expense increased $1.1 million, or
8.5%, from $13.4 million at September 30, 1999 to $14.5 million at September 30,
2000. The largest increase was in salary and benefit expense, which increased
$517,000, or 7.1% primarily due to the addition of trust officers and related
staff at Northeast Pennsylvania Trust Co. and the addition of three branches in
operation for the entire fiscal year 2000 as compared to fiscal 1999. Other
non-interest expense increased $404,000, or 17.8%, primarily due to a $208,000
increase in the amortization of goodwill related to the Danville branch
purchase, due to a full year of amortization being expensed for fiscal 2000
compared to four months in fiscal 1999. Also contributing to the increase in
other non-interest expense was an increase in loan origination expense
specifically for costs associated with the higher level of indirect auto loan
originations. Occupancy costs increased $235,000, or 13.7%, due to branch,
company and technological expansion. FHLB and other service charges increased
$189,000 to $670,000 as a result of increased charges for higher ATM volume.
Professional fees decreased $234,000, or 32.8% as a result of less legal fees
being incurred in fiscal 2000 compared to prior years.
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.
Income Taxes. For fiscal 2000, the Company had income tax expense of $581,000,
compared to $1.0 million at September 30, 1999. The decrease in income tax
expense was attributable to the level of tax free income the Company received
during the year. The effective tax rate for September 30, 2000 was 12.9%
compared to 18.2% at September 30, 1999.
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 was substantially below the statutory
tax rate was the level of tax-free income generated by the Company's municipal
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.
FINANCIAL CONDITION
Total assets increased $25.1 million from $612.2 million at September 30, 1999
to $637.3 million at September 30, 2000. The growth in assets was primarily due
to increases in loans receivable, other assets and cash, offset by a decrease in
securities available-for-sale.
Loans increased $50.9 million to $415.1 million at September 30, 2000. This was
primarily due to a $21.2 million increase in multi-family and commercial real
estate loans due to marketing efforts and competitive pricing of such products.
Automobile loans increased $16.3 million as a result of more participating
automobile dealers. One-to four-family loans increased $8.9 million mainly due
to the purchase of loans from other financial institutions. Consumer loans other
than automobile loans increased $5.5 million, or 6.9%, as a direct result of
increased originations due to marketing efforts and competitive pricing of such
loans. Commercial loans increased $1.2 million as a result of business
development efforts.
Prepaid expenses and other assets increased $3.7 million to $12.7 million at
September 30, 2000. This change was primarily due to a $2.0 million investment
in the preferred stock of Buildersfirst.com. Contributing to this change was an
$894,000 increase in deferred income taxes.
Available-for-sale securities decreased $32.3 million, from $189.8 million at
September 30, 1999 to $157.5 million at September 30, 2000. The decrease was
primarily attributable to the effect of security sales, particularly tax-free
municipal bonds combined with a change in unrealized loss.
Total deposits increased $43.7 million, or 11.6%, to $419.7 million at September
30, 2000. The increase in deposits was primarily due to a $25.6 million increase
in certificates of deposit from $237.0 million at September 30, 1999 to $262.6
million at September 30, 2000, as a result of increased marketing efforts and
competitive pricing of such products. Also contributing to this change was an
increase of $10.5 million in money market accounts and $4.4 million in
non-interest bearing deposits as a result of a more active solicitation of such
accounts.
Page 8
<PAGE>
FHLB advances decreased $18.5 million from $156.0 million at September 30, 1999
to $137.5 million at September 30, 2000. This was a result of proceeds from the
sale of tax free investments which were used to pay down the FHLB advances.
Total equity decreased $2.5 million to $73.0 million at September 30, 2000. This
decrease in equity resulted primarily from the repurchase of the Company's
common stock, at a cost of $4.9 million, along with an $837,000 increase in
unrealized loss on securities. These decreases were offset by operating results
of $3.9 million for the year, reduced by a $1.5 million cash dividend for the
year, resulting in a net increase of $2.4 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,
2000, the available-for-sale securities portfolio totaled $157.5 million, or
24.7% of assets, and the held-to-maturity portfolio totaled $30.3 million, or
4.8% 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>
<S> <C> <C> <C> <C> <C> <C>
At September 30,
(in thousands)
2000 1999 1998
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
Investment securities:
Debt securities held-to-maturity:
Obligations of U.S. government
agencies $26,785 $24,906 $26,783 $25,155 $31,770 $32,072
Other securities 3,551 3,223 3,549 3,160 - -
------- ------- ------- ------- ------- -------
Total $30,336 $28,129 $30,332 $28,315 $31,770 $32,072
------- ------- ------- ------- ------- -------
Debt securities available-for-sale:
Obligations of U.S. Treasury and U.S.
government agencies $39,477 $38,073 $43,464 $41,888 $55,661 $56,260
Other securities 60,639 55,881 85,048 80,077 47,867 48,732
------- ------- ------- ------- ------- -------
Total $100,116 $93,954 $128,512 $121,965 $103,528 $104,992
------- ------- ------- ------- ------- -------
Equity securities available-for-sale:
FHLB Stock $6,873 $6,873 $7,824 $7,824 $5,325 $5,325
Freddie Mac Stock 910 1,260 329 2,860 697 3,126
Fannie Mae Stock 1,000 1,003 - - - -
Other equity securities 813 1,308 763 853 - -
Total equity securities available-for-
sale 9,596 10,444 8,916 11,537 6,022 8,451
------- ------- ------- ------- ------- -------
Total debt and equity securities $140,048 $132,527 $167,760 $161,817 $141,320 $145,515
======= ======= ======= ======= ======= =======
Mortgage-related securities available-for-
sale:
Freddie Mac $9,049 $8,918 $8,633 $8,533 $10,798 $10,933
Fannie Mae 16,301 16,089 13,311 13,068 14,337 14,604
Ginnie Mae 4,990 5,000 9,840 9,945 21,968 22,211
Collateralized mortgage obligations 23,470 23,069 24,250 23,745 24,708 24,861
Other securities - - 1,052 1,042 3,042 3,042
------- ------- ------- ------- ------- -------
Total mortgage-related securities
available-for-sale 53,810 53,076 57,086 56,333 74,853 75,651
------- ------- ------- ------- ------- -------
Total mortgage-related securities 53,810 53,076 57,086 56,333 74,853 75,651
======= ======= ======= ======= ======= =======
Total securities $193,858 $185,603 $224,846 $218,150 $216,173 $221,166
======= ======= ======= ======= ======= =======
</TABLE>
Page 9
<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.
<TABLE>
<S> <C> <C> <C> <C> <C>
As of September 30, 2000
------------------------
(in thousands)
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
---------- -------------- --------------- ---------- -----
Available-for-sale securities:
Municipal securities - - - $35,502 $35,502
Obligations of U.S. Government agencies 1,500 5,000 31,478 1,499 39,477
Mortgage-related securities - 1,631 9,046 43,133 53,810
Equity securities 8,596 - - 1,000 9,596
Trust Preferred securities - - - 13,729 13,729
Corporate Bonds 3,504 7,904 - - 11,408
------ ------ ------ ------ ------
Total securities at amortized cost $13,600 $14,535 $40,524 $94,863 $163,522
====== ====== ====== ====== ======
Total securities at fair value $14,432 $14,533 $39,152 $89,357 $157,474
====== ====== ====== ====== ======
Weighted Average Yield 6.01% 6.92% 6.54% 6.26% 6.37%
Held-to-maturity securities:
Municipal securities - - - $3,551 $3,551
Obligations of U.S. Government agencies - - - 26,785 26,785
Total securities at amortized cost $- $- $- $30,336 $30,336
====== ====== ====== ====== ======
Total securities at fair value $- $- $- $28,129 $28,129
====== ====== ====== ====== ======
Weighted Average Yield - - - 6.47% 6.47%
</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 $50.9 million from fiscal 1999. The largest increase was in
multi-family and commercial real estate loans which increased $21.2 million to
$52.7 million at September 30, 2000 due to marketing efforts and competitive
pricing.
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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At September 30,
(in thousands)
2000 1999 1998 1997 1996
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of total Amount of Total
Real Estate Loans:
One- to four-family $205,790 48.90% $196,885 53.43% $176,924 61.74% $179,101 67.78% $170,773 69.68%
Multi family and
commercial 52,669 12.51 31,497 8.55 11,938 4.17 6,701 2.54 4,429 1.81
Construction 3,152 0.75 3,983 1.08 3,759 1.31 5,818 2.20 5,129 2.09
Total real estate
loans $261,611 62.16 $232,365 63.06 $192,621 67.22 $191,620 72.52 $180,331 73.58
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Home equity loans
and lines of credit $ 72,416 17.21 $ 70,118 19.03 $ 52,244 18.23 $ 41,278 15.62 $ 38,054 15.53
Automobile 50,941 12.11 34,619 9.40 24,589 8.58 13,678 5.18 10,594 4.32
Education 3,516 0.84 2,796 0.76 2,351 0.82 2,348 0.89 2,538 1.04
Unsecured lines of
credit 1,817 0.43 1,744 0.47 1,589 0.55 1,310 0.49 959 0.39
Other 8,021 1.91 5,571 1.51 3,423 1.20 3,229 1.22 3,309 1.35
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans $136,711 32.50 $114,848 31.17 $ 84,196 29.38 $ 61,843 23.40 $ 55,454 22.63
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial loans $ 22,481 5.34 $ 21,262 5.77 $ 9,742 3.40 $ 10,775 4.08 $ 9,280 3.79
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans $420,803 100.00% $368,475 100.00% $286,559 100.00% $264,238 100.00% $245,065 100.00%
====== ====== ====== ====== ======
Less:
Deferred loan
origination fees
and discounts $ 1,536 $ 1,361 $ 1,580 $ 1,497 $ 1,419
Allowance for
loan losses 4,162 2,924 2,273 1,272 730
-------- -------- -------- -------- --------
Total loans, net $415,105 $364,190 $282,706 $261,469 $242,916
======== ======== ======== ======== ========
</TABLE>
Page 10
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity of
the Company's total loans at September 30, 2000. The table does not include the
effect of future principal prepayments.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
At September 30, 2000
(in thousands)
Multi-
One-to Family and
Four- Commercial Total
Family Real Estate Construction(1) Consumer Commercial Loans
Amount due in:
One year or less $10,417 $5,424 $- $22,227 $10,441 $48,509
After one year:
More than one year to five years 41,461 6,108 - 64,881 3,369 115,819
More than five years 153,912 41,137 3,152 49,603 8,671 256,475
-------- ------- ------ -------- ------- --------
Total amount due $205,790 $52,669 $3,152 $136,711 $22,481 $420,803
======== ======= ====== ======== ======= ========
<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, 2000, the dollar amount of
loans contractually due after September 30, 2001, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<S> <C> <C> <C>
Due After September 30, 2001
(in thousands)
Fixed Adjustable Total
Real estate loans:
One- to four-family $91,056 $104,317 $195,373
Multi-family and commercial
real estate 25,278 21,967 47,245
Construction 1,158 1,994 3,152
----- ----- -----
Total real estate loans 117,492 128,278 245,770
------- ------- -------
Consumer loans 104,166 10,318 114,484
Commercial loans 4,846 7,194 12,040
----- ----- ------
Total loans $226,504 $145,790 $372,294
======== ======== ========
</TABLE>
Non-Performing Assets and Impaired Loans. The following table sets forth
information regarding non-performing loans, real estate owned ("REO") and other
repossessed assets. At September 30, 2000, non-performing loans totaled $3.5
million consisting of 58 non-accrual loans, one impaired commercial loan for
$2.0 million, and REO totaled $51,000 consisting of three one- to four-family
loans. 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, 2000, 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 $107,000. At September 30, 2000, the Company had a $5.0 million
recorded investment in impaired loans, all of which had specific allowances
totaling $1.6 million. At September 30, 1999, there was $1.8 million of impaired
loans, all of which had specific loan loss allowances totaling $558,000.
<TABLE>
<S> <C> <C> <C> <C> <C>
At September 30,
(in thousands)
2000 1999 1998 1997 1996
Non-performing loans:
One- to four-family real estate $869 $848 $ 509 $622 $562
Consumer 240 261 254 152 154
Commercial 2,390 262 476 - -
----- --- --- - -
Total(1) $3,499 $1,371 1,239 774 716
Real estate owned (REO)(2) 51 19 63 319 453
Other repossessed assets(2) 122 79 49 - -
--- -- -- - -
Total non-performing assets(3) $3,672 $1,469 $1,351 $1,093 $1,169
====== ====== ====== ====== ======
Troubled debt restructurings - - - $112 -
Troubled debt restructurings and
total non-performing assets $3,672 $1,469 $1,351 $1,205 $1,169
====== ====== ====== ====== ======
Total non-performing loans and
troubled debt restructurings as
a percentage of total loans 0.83% 0.38% 0.43% 0.34% 0.29%
Total non-performing assets and
troubled debt restructurings as a
percentage of total assets 0.58% 0.24% 0.26% 0.33% 0.38%
<FN>
(1) Total non-performing loans equal total non-accruing loans plus other impaired 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, other repossessed assets and REO.
</FN>
</TABLE>
Page 11
<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 given the state of the general and regional
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, 2000, the Company's allowance for loan
losses was .99% of total loans compared to .80% as of September 30, 1999. The
increase in the allowance was the result of the impairment, as of September 30,
2000, of a borrower's ability to repay a $2.0 million commercial loan which was
discovered by the Bank in early October 2000. This commercial loan is secured by
a portfolio of NASDAQ-traded securities whose value has fluctuated greatly in
recent periods. The Company will continue to monitor and modify its allowances
for loan losses as conditions dictate. 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 recognizes that its allowance for
loan losses as a percentage of total loans may need to increase in future
periods.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<S> <C> <C> <C> <C> <C>
At or for the Fiscal Years Ended September 30,
(in thousands)
2000 1999 1998 1997 1996
Allowance for loan losses,
beginning of year $2,924 $2,273 $1,272 $730 $724
Charged-off loans:
One- to four-family real estate 3 10 19 66 34
Consumer 244 91 57 66 60
--- -- -- -- --
Total charged-off loans 247 101 76 132 94
--- --- -- --- --
Recoveries on loans previously
charged off:
One- to four-family real estate - - - - -
Consumer 18 5 18 23 3
-- - -- -- -
Total recoveries 18 5 18 23 3
-- - -- -- -
Net loans charged-off 229 96 58 109 91
Provision for loan losses 1,467 747 1,059 651 97
----- --- ----- --- --
Allowance for loan losses,
end of period $4,162 $2,924 $2,273 $1,272 $730
====== ====== ====== ====== ====
Net loans charged-off to average
interest-earning loans 0.06% 0.03% 0.02% 0.04% 0.04%
----- ----- ----- ----- -----
Allowance for loan losses
to total loans 0.99% 0.80% 0.80% 0.48% 0.30%
----- ----- ----- ----- -----
Allowance for loan losses to
non-performing loans and troubled
debt restructuring 118.95% 213.27% 183.45% 143.57% 101.96%
------- ------- ------- ------- -------
Net loans charged-off to allowance
for loan losses 5.50% 3.28% 2.55% 8.57% 12.47%
----- ----- ----- ----- ------
Recoveries to charge-offs 7.29% 4.95% 23.68% 17.42% 3.19%
----- ----- ------ ------ -----
</TABLE>
Page 12
<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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At September 30,
(in thousands)
2000 1999 1998
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 $979 23.52% 62.16% $1,037 35.47% 63.06% $748 32.91% 67.22%
Consumer 489 11.75 32.50 424 14.50 31.17 300 13.20 29.38
Commercial 2,268 54.49 5.34 1,072 36.67 5.77 546 24.02 3.40
Nonallocated 426 10.24 - 391 13.36 - 679 29.87 -
Total Allowance
for loan losses $4,162 100.00% 100.00% $2,924 100.00% 100.00% $2,273 100.00% 100.00%
====== ======= ======= ====== ======= ======= ====== ======= =======
1997 1996
Percent of Percent of
% 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 $607 47.72% 72.52% $427 58.49% 73.58%
Consumer 194 15.25 23.40 157 21.51 22.63
Commercial 141 11.09 4.08 146 20.00 3.79
Nonallocated 330 25.94 - - - -
Total Allowance
for loan losses $1,272 100.00% 100.00% $730 100.00% 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 62.6% of the funds deposited in the Company are in certificate of
deposit accounts. At September 30, 2000, core deposits (savings, NOW and money
market accounts) represented 33.3% 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.
Page 13
<PAGE>
At September 30, 2000, the Company had $81.8 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<S> <C>
Maturity Period Amount
(in thousands)
Three months or less $56,223
Over 3 through 6 months 15,252
Over 6 through 12 months 5,683
Over 12 months 4,689
-----
Total $81,847
=======
</TABLE>
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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At September 30,
2000 1999 1998
(in thousands)
Percent Percent Percent
Total Total Total
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Paid Balanc Deposits Rate Paid Balance Deposits Rate Paid
Savings accounts $68,095 18.1% 2.15% $69,546 20.2% 2.11% $71,102 22.6% 2.26%
Money Market
accounts 23,502 6.3 4.05 19,353 5.6 3.38 14,509 4.6 2.91
NOW accounts 36,703 9.8 0.89 31,823 9.2 1.08 30,054 9.5 1.14
Certificates of Deposit 232,069 61.7 5.42 212,933 61.4 5.19 189,306 60.1 5.45
Non-interest-bearing
deposits:
Demand deposits 15,573 4.1 - 12,409 3.6 - 10,003 3.2 -
Total average
deposits $375,942 100.00% 4.07% $346,064 100.00% 3.91% $314,974 100.00% 4.04%
</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, 2000, the Bank had $137.5 million in outstanding FHLB advances,
compared to $156.0 million at September 30, 1999. 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, 2000 and 1999, the Bank's liquidity ratios were
6.7% and 8.7%, respectively.
At September 30, 2000, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $58.0 million, or 9.3% of total
adjusted assets, which is above the required level of $9.4 million, or 1.5%;
core capital of $58.0 million, or 9.3% of total adjusted assets, which is above
the required level of $18.8 million, or 3.0%; and risk-based capital of $62.3
million, or 17.2% of risk-weighted assets, which is above the required level of
$29.1 million, or 8.0%.
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, 2000, the Bank had total equity, determined in
accordance with GAAP, of $56.0 million, or 9.0% of total assets, which
approximated the Bank's regulatory tangible capital at that date of 9.3% 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.
Page 14
<PAGE>
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, 2000, cash and cash
equivalents and investment and mortgage-related securities available-for-sale
totaled $163.8 million, or 25.7% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At September 30, 2000, the Bank had $137.5 million in
advances outstanding from the FHLB, and had an additional overall borrowing
capacity from the FHLB of $281.7 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, 2000, the Company had commitments to originate and purchase
loans and unused outstanding lines of credit and undisbursed proceeds of
construction mortgages totaling $45.1million. 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, 2000, totaled $195.8 million. The Company expects that
substantially all of the maturing certificate accounts will be retained by the
Company at maturity.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which requires 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 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" and amended
again in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment to FASB No. 133." This
Statement established 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 became effective for fiscal years
beginning after December 15, 1999. Earlier adoption was permitted. The Company
adopted SFAS 133, prior to the issuance of SFAS 137 and SFAS 138, 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 September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement supercedes and replaces the guidance in Statement 125. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, although it carries over
most of Statement 125's provisions without reconsideration. The Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001 and for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application of its accounting
provisions is not permitted. The Company has not yet determined the impact, if
any, of this statement on the Company's financial condition, equity, results of
operations, or disclosure.
Page 15
<PAGE>
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, 2000, the Company had 1,535 registered common
stockholders of record. The following table sets forth the range of high and low
sales prices for the common stock for the periods presented.
<TABLE>
The closing market price of the common stock at September 30, 2000 was 11 1/2.
<S> <C> <C> <C> <C>
Stock Price Range
Low High Dividends
2000 1st quarter 9 3/8 10 11/16 .07
2nd quarter 9 1/4 10 .07
3rd quarter 9 10 5/8 .08
4th quarter 10 12 1/2 .08
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
</TABLE>
Quarterly Financial Data (unaudited)
(In Thousands, Except Per Share Amount)
<TABLE>
<S> <C> <C> <C> <C>
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Net Interest Income $4,725 $4,706 $4,615 $4,569
Provision for Loan Losses 205 238 141 883
Other Operating Income 501 358 513 524
Other Operating Expense 3,712 3,553 3,609 3,653
Net Income $1,146 $1,099 $1,176 $515
---------------------------------------------------------------------------------------------------------------------
Earnings Per Share
Basic $.22 $.23 $.25 $.11
Diluted $.22 $.22 $.24 $.11
---------------------------------------------------------------------------------------------------------------------
1999
----
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
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 16
<PAGE>
Consolidated Statements of Financial Condition
September 30, 2000 and 1999
(in thousands, except share and per share data)
<TABLE>
<S> <C> <C>
September 30, September 30,
2000 1999
---- ----
Assets
------
Cash and cash equivalents $6,295 $4,177
Securities available-for-sale 157,474 189,835
Securities held-to-maturity (estimated fair value of $28,129
in 2000 and $28,315 in 1999) 30,336 30,332
Loans (less allowance for loan losses of $4,162 for 2000 and $2,924 for 1999) 415,105 364,190
Accrued interest receivable 5,401 4,769
Assets acquired through foreclosure 173 98
Property and equipment, net 9,878 9,868
Other assets 12,680 8,956
------ -----
Total assets $637,342 $612,225
======== ========
Liabilities and Equity
----------------------
Deposits $419,671 $375,983
Federal Home Loan Bank advances 137,461 155,980
Other borrowings 1,654 524
Advances from borrowers for taxes and insurance 639 1,040
Accrued interest payable 2,472 1,317
Other liabilities 2,470 1,905
----- -----
Total liabilities $564,367 $536,749
Preferred stock ($.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 62,164 62,119
Common stock acquired by stock benefit plans (6,221) (7,066)
Retained earnings - substantially restricted 33,207 30,818
Accumulated other comprehensive income (loss) (3,711) (2,874)
Treasury stock, at cost (1,134,201 shares) (12,528) (7,585)
-------- -------
Total equity $72,975 $75,476
------- -------
Total liabilities and equity $637,342 $612,225
======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
Page 17
<PAGE>
Consolidated Statements of Operations
For the Years Ended September 30, 2000, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Interest Income:
Loans $31,221 $24,679 $21,650
Mortgage-related securities 3,693 4,190 3,362
Investment securities:
Taxable 7,184 5,631 4,345
Non-taxable 3,048 3,174 1,185
----- ----- -----
Total interest income 45,146 37,674 30,542
------ ------ ------
Interest expense:
Deposits 15,311 13,516 12,715
Federal Home Loan Bank advances and other 11,220 6,306 2,851
------ ----- -----
Total interest expense 26,531 19,822 15,566
------ ------ ------
Net interest income 18,615 17,852 14,976
Provision for loan losses 1,467 747 1,059
----- --- -----
Net interest income after provision for loan 17,148 17,105 13,917
------ ------ ------
losses
Non-interest income:
Service charges and other fees 1,246 881 678
Other income 363 426 197
Insurance premium income 275 276 48
Gain (loss) on sale of:
Real estate owned (48) (56) (86)
Loans 24 287 55
Available-for-sale securities 37 63 62
Other (1) (9) 2
--- --- -
Total non-interest income 1,896 1,868 956
Non-interest expense:
Salaries and net employee benefits 7,845 7,328 5,916
Occupancy costs 1,956 1,721 1,581
Federal deposit insurance premiums 227 294 287
Data processing 610 495 286
Professional fees 480 714 418
Federal Home Loan Bank and other service charges 670 481 392
Charitable contributions 66 93 4,934
Other 2,673 2,269 1,465
----- ----- -----
Total non-interest expense 14,527 13,395 15,279
Income (loss) before income taxes 4,517 5,578 (406)
Income tax expense (benefit) 581 1,013 (359)
--- ----- -----
Net income (loss) $3,936 $4,565 $(47)
====== ====== =====
Earnings per share -basic .84 .84 (.20) (a)
Earnings per share - diluted .81 .80 (.20) (a)
<FN>
(a) Earnings per share is calculated since March 31, 1998, the date of the
initial public offering. Had the weighted average shares been outstanding for
the entire fiscal year, proforma earnings per share would have been $(.01).
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
Page 18
<PAGE>
Consolidated Statements of Comprehensive Income
For the Years Ended September 30, 2000, 1999 and 1998
(in thousands)
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Net income (loss) $3,936 $4,565 $(47)
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period (813) (5,710) 1,636
Less: Reclassification adjustment for gains
included in net income 24 42 41
-- -- --
Other comprehensive income (loss) $(837) $(5,752) $1,595
------ -------- ------
Comprehensive income (loss) $3,099 $(1,187) $1,548
====== ======== ======
</TABLE>
Page 19
<PAGE>
Consolidated Statements of Changes in Equity
For the Years Ended September 30, 2000, 1999, and 1998
(in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Accumulated
Additional Acquired by Other
Common Paid In stock benefit Retained Comprehensive Treasury Total
Stock Capital plans Earnings income (loss) Stock Equity
------ --------- ------------- -------- ------------- -------- ------
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
ESOP shares committed to be released 89 328 417
Stock awards (44) 517 473
Net changes in (losses) on
securities available for sale, net of tax (837) (837)
Treasury stock at cost, (507,534 shares) (4,943) (4,943)
Cash dividend paid (1,547) (1,547)
Net income 3,936 3,936
------- ------- ------- ------- ------- ------- --------
Balance, September 30, 2000 $ 64 $ 62,164 $ (6,221) $ 33,207 $ (3,711) $(12,528) $ 72,975
======= ======= ======= ======= ======= ======= ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
Page 20
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2000, 1999 and 1998
(in thousands)
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Operating Activities:
Net Income (loss) $3,936 $4,565 $(47)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision (recovery) for REO loss 100 39 (4)
Provision for loan losses 1,467 747 1,059
Depreciation 1,153 885 621
Deferred income tax benefit (362) (193) (1,929)
Funding of First Federal Charitable Foundation - - 4,761
ESOP shares committed to be released 417 634 467
Stock award expense 473 447 -
Amortization and accretion on:
Held-to-maturity securities (4) 34 77
Available-for-sale securities (2,337) 422 222
Amortization of deferred loan fees (159) (618) (338)
(Gain) loss on sale of:
Assets acquired through foreclosure 48 56 86
Loans (24) (287) (55)
Available-for-sale securities (37) (63) (62)
(Gain) loss on disposal of property and equipment - 9 (2)
Changes in assets and liabilities:
Increase in accrued interest receivable (632) (771) (1,829)
Increase in other assets (2,825) (2,258) (371)
Increase in accrued interest payable 1,155 289 283
Increase (decrease) in accrued income taxes payable (271) (562) 604
Increase (decrease) in other liabilities 832 635 (469)
--- --- -----
Net cash provided by operating activities $2,930 $ 4,010 $3,074
------ ------- ------
Investing Activities:
Net increase in loans $(54,619) $(89,796) $(30,490)
Proceeds from sale of:
Available-for-sale securities 56,412 19,401 6,855
Assets acquired through foreclosure 391 170 347
Loans 1,806 8,219 8,365
Proceeds from repayments of held-to-maturity securities - 17,953 23,041
Proceeds from repayments of available-for-sale securities 9,404 54,860 30,752
Proceeds from disposal of fixed assets 18 74 2
Purchase of:
Held-to-maturity securities - (16,549) (72,166)
Available-for-sale securities (26,177) (80,385) (120,120)
Office properties and equipment (1,181) (2,188) (2,507)
Federal Home Loan Bank stock (6,274) (4,275) (3,271)
------- ------- -------
Net cash used in investing activities $(20,220) $(92,516) $(159,192)
--------- --------- ----------
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
Page 21
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2000, 1999 and 1998
(in thousands)
<TABLE>
<S> <C> <C> <C>
2000 1999 1998
---- ---- ----
Financing Activities:
Net increase in deposit accounts $43,570 $51,978 $9,882
Net increase (decrease) in Federal Home Loan Bank (18,500) (1,500) 18,000
short-term advances
Borrowings of Federal Home Loan Bank
long-term advances 30,000 51,000 65,000
Repayments of Federal Home Loan Bank long-term advances (30,019) (18) (18)
Net increase (decrease) in advances from
borrowers for taxes and insurance (401) 323 240
Net increase (decrease) in other borrowings 1,248 (301) 733
Net proceeds from issuance of common stock - - 52,120
Purchase of common stock for stock
incentive plan - (3,312) -
Purchase of treasury stock (4,943) (7,585) -
Cash dividend on common stock (1,547) (955) -
------- ----- ----- -
Net cash provided by financing activities $19,408 $89,630 $145,957
------- ------- --------
Increase (decrease) in cash and cash equivalents 2,118 1,124 (10,161)
Cash and cash equivalents, beginning of year 4,177 3,053 13,214
----- ----- ------
Cash and cash equivalents, end of year $6,295 $4,177 $3,053
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $25,642 $19,533 $15,284
======= ======= =======
Income taxes $1,020 $1,726 $665
====== ====== ====
Supplemental disclosure - non-cash and financing information:
Transfer from loans to real estate owned $614 $251 $222
==== ==== ====
Transfer of held-to-maturity securities to
available-for-sale N/A N/A $56,203
=== === =======
Net change in unrealized gains (losses) on securities
available-for-sale, net of tax $(837) $(5,752) $1,595
====== ======== ======
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
Page 22
<PAGE>
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 community
offices in Northeastern and Central Pennsylvania and through its principal
subsidiary, First Federal Bank ("the Bank") . The Bank serves its loan customers
through a loan production office located in Monroe County, Pennsylvania. All of
the offices 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.
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.
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.
Page 23
<PAGE>
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, 2000 and
1999 is, net of accumulated amortization, $1.3 and $1.6 million, 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, 2000 and 1999 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
$.81.for the year ended September 30, 2000, $.84 and $.80, respectively, for the
year ended September 30, 1999, and $(.20) for the six months ended September 30,
1998
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<S> <C> <C> <C>
For the Year Ended For the Year Ended For the Six Months
September 30, September 30, Ended September 30,
Basic: 2000 1999 1998
------------------------------------------------------------------
Net Income (loss) $3,935,652 $4,565,480 $(1,204,000)
========== ========== ============
Weighted average shares outstanding 4,551,672 5,368,458 5,913,162
Plus: ESOP shares released or committed
to be released 115,694 65,464 8,570
------- ------ -----
Basic Shares Outstanding 4,667,366 5,433,922 5,921,732
========= ========= =========
Earnings per share - basic $.84 $.84 $(.20)
==== ==== ======
Diluted(1):
Net Income (loss) $3,935,652 $4,565,480 $(1,204,000)
========== ========== ============
Basic weighted shares outstanding 4,667,366 5,433,922 5,921,732
Dilutive Instruments:
Dilutive effect of outstanding stock options 11 - -
Dilutive effect of stock awards 193,869 242,790 -
------- ----------------------------
Dilutive shares outstanding 4,861,246 5,676,712 5,921,732
========= ========= =========
Earnings per share - diluted $.81 $.80 $(.20)
==== ==== ======
<FN>
The company had 506,985 and 618,355 anti-dilutive common stock options
outstanding as of September 30, 2000 and 1999, respectively. These options are
not included in the calculation of diluted earnings per share for the periods
presented.
(1) Diluted earnings per share include the dilutive effect of the Company's
weighted average stock options/awards outstanding using the Treasury Stock
method.
</FN>
</TABLE>
Page 24
<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 $25.0 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 $6.8 million at September 30, 2000.
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, 2000, there were no shares of
preferred stock issued.
3.Securities.
Securities are summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
Available-for-sale securities:
Municipal securities $35,503 $- $(2,471) $33,032
Obligations of U.S. Government agencies 39,477 - (1,404) 38,073
Mortgage-related securities 53,810 88 (822) 53,076
Trust Preferred securities 13,729 - (2,296) 11,433
Corporate Bonds 11,407 22 (13) 11,416
---------------------------------------------------------------
Total debt securities 153,926 110 (7,006) 147,030
FHLB 6,873 - - 6,873
Freddie Mac 910 350 - 1,260
Fannie Mae 1,000 3 - 1,003
Other equity securities 813 497 (2) 1,308
------------------------------------------------------------
Total equity securities 9,596 850 (2) 10,444
Total $163,522 $960 $(7,008) $157,474
======== ==== ======== ========
Held-to-maturity securities:
Municipal securities $3,551 $- $(328) $3,223
Obligations of U.S. government agencies 26,785 - (1,879) 24,906
---------------------------------------------------------------
Total $30,336 $- $(2,207) $28,129
======= == ======== =======
</TABLE>
Page 25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
------------------
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
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
FHLB 7,824 - - 7,824
Freddie Mac 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
======= == ======== =======
</TABLE>
The amortized cost and estimated fair value of securities by contractual
maturity:
<TABLE>
<S> <S> <C> <C> <C> <C>
September 30, 2000
------------------
(in thousands)
Maturing Maturing after Maturing after Maturing
within one one year but 5 years but after 10
year ithin 5 years within 10 years years Total
-------------------------------------------------------------------
Available-for-sale securities:
Municipal securities $- $- $- $35,503 $35,503
Obligations of U.S. Government agencies 1,500 5,000 31,478 1,499 39,477
Mortgage-related securities - 1,631 9,046 43,133 53,810
Equity securities 8,596 - - 1,000 9,596
Trust Preferred securities - - - 13,729 13,729
Corporate Bonds 3,504 7,903 - - 11,407
------------------------------------------------------------------
Total securities at amortized cost $13,600 $14,534 $40,524 $94,864 $163,522
Total securities at fair value $14,432 $14,533 $39,152 $89,357 $157,474
Weighted Average Yield 6.01% 6.92% 6.54% 6.26% 6.37%
Held-to-maturity securities:
Municipal securities $- $- $- $3,551 $3,551
Obligations of U.S. Government agencies - - - 26,785 26,785
----------------------------------------------------------------------
Total securities at amortized cost $- $- $- $30,336 $30,336
Total securities at fair value $- $- $- $28,129 $28,129
Weighted Average Yield - - - 6.47% 6.47%
</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, 2000 were $56,412,000 resulting in gross realized gains of
$2,279,091 and gross realized losses of $2,241,950. 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 $85,691,746, at September 30, 2000, 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 $56,200,000 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,"
which was adopted by the Bank as of July 1, 1998.
Page 26
<PAGE>
4. Loans
Loans are summarized as follows:
<TABLE>
<S> <C> <C>
At September 30,
----------------
(in thousands)
2000 1999
---- ----
Real Estate loans:
One- to four-family $205,790 $196,885
Multi-family and commercial 52,669 31,497
Construction 3,152 3,983
----- -----
Total real estate loans $261,611 $232,365
-------- --------
Consumer Loans:
Home equity loans and lines of credit $72,416 $70,118
Automobile 50,941 34,619
Education 3,516 2,796
Unsecured lines of credit 1,817 1,744
Other 8,021 5,571
----- -----
Total consumer loans $136,711 $114,848
-------- --------
Commercial loans $22,481 $21,262
------- -------
Total loans $420,803 $368,475
Less:
Allowances for loan losses (4,162) (2,924)
Deferred loan origination fees (1,536) (1,361)
------- -------
Total loans, net $415,105 $364,190
======== ========
</TABLE>
Impaired loans and the related specific loan loss allowances were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
September 30,
-------------
(in thousands)
2000 1999
---- ----
Allowance Allowance
Recorded for Net Recorded for Net
Investments Losses Investments Investments Losses Investments
Non-accrual loans:
With specific allowances $1,608 $345 $1,263 $1,371 $459 $912
Other impaired loans:
With specific allowances $3,418 $1,233 $2,185 $414 $99 $315
------ ------ ------ ------ ---- -----
$5,026 $1,578 $3,448 $1,785 $558 $1,227
====== ====== ====== ====== ====
<FN>
The average net recorded investment in impaired loans for the years ended
September 30, 2000, 1999, and 1998, respectively, was $2,107,392, $1,166,594,
and $898,266. The related amount of interest income recognized on impaired loans
was $257,000, $90,000, and $73,000 for the years ended September 30, 2000, 1999,
and 1998, respectively.
Non-accrual loans totaled $1,608,000, $1,371,000, and $1,239,000 at September
30, 2000,1999, and 1998, respectively. Loans in non-accrual status as of
September 30, 2000, 1999, and 1998 had interest due but not recognized of
approximately $107,000, $70,000, and $58,000, respectively. The amount of
interest income on these loans that was included in net income in fiscal year
2000, 1999, and 1998 was $70,000, $69,000, and $55,000, respectively. There were
no troubled debt restructuring loans at September 30, 2000 and 1999. The Bank
has no commitments to lend additional funds to borrowers whose loans were
classified as non-performing or troubled debt restructuring.
The increase in impaired loans and the allowance for loan losses relates to the
impairment, as of September 30, 2000, of a borrowers ability to repay a $2.0
million commercial loan which was discovered by the Bank in early October 2000.
This commercial loan is secured by a portfolio of NASDAQ traded securities whose
value has fluctuated greatly in recent periods.
</FN>
</TABLE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<S> <C> <C> <C>
September 30,
-------------
(in thousands)
2000 1999 1998
---- ---- ----
Balance, beginning $2,924 $2,273 $1,272
Provision charged to income 1,467 747 1,059
Charge-offs (247) (101) (76)
Recoveries 18 5 18
-- - --
Balance, ending $4,162 $2,924 $2,273
====== ====== ======
</TABLE>
Page 27
<PAGE>
An analysis of the activity of loans to directors and executive officers is as
follows:
<TABLE>
<S> <C>
September 30, 2000
------------------
(in thousands)
Balance, beginning of year $1,373
New loans and line of credit advances 825
Repayments (295)
-----
Balance end of year $1,903
======
</TABLE>
5. Mortgage Servicing Activity
A summary of mortgage servicing rights activity follows:
<TABLE>
<S> <C>
Years Ended September 30,
-------------------------
(in thousands)
2000 1999
---- ----
Balance, beginning of year $303 $62
Originated servicing rights 7 275
Amortization (59) (34)
---- ----
Balance, end of year $251 $303
==== ====
</TABLE>
At September 30, 2000, 1999, and 1998, the Bank serviced loans for others of
$37,382,920, $49,741,195, and $15,805,965, respectively. Loans serviced by
others for the Bank as of September 30, 2000, 1999, and 1998 were $64,248,557,
$60,341,796, and $5,960,235, respectively.
6. Office Properties and Equipment
Properties and equipment by major classification are summarized as follows:
<TABLE>
<S> <C> <C>
September 30,
-------------
(in thousands)
2000 1999
---- ----
Land $1,231 $1,184
Buildings and improvements 8,840 8,843
Furniture, fixtures and equipment 6,005 5,008
Leasehold improvements 845 844
--- ---
Total $16,921 $15,879
Less accumulated depreciation 7,043 6,011
----- -----
Net $9,878 $9,868
====== ======
</TABLE>
The Bank has entered into operating leases for several of its branch facilities
and operating departments. The minimum annual rental payments under these leases
at September 30, 2000, are as follows:
<TABLE>
<S> <C> <C>
Years Ending September 30,
--------------------------
(in thousands)
2001 $291
2002 186
2003 140
2004 66
2005 11
2006 and after 5
-
Total $699
====
</TABLE>
Rent expense was $212,000, $230,000, and $263,000, for the years ended September
30, 2000, 1999, and 1998, respectively.
Page 28
<PAGE>
7. Deposits
Deposits consist of the following major classifications:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
At September 30,
----------------
(in thousands)
2000 1999
---- ----
Weighted Weighted
Average Percent of Average Rate Percent of
Rate Amount Total Amount Total
-------- ------ ---------- ------------ ------ ----------
Savings accounts
(passbook, statement, clubs) 2.48% $70,369 16.77% 2.08% $69,667 18.53%
Money market accounts 4.87 31,635 7.50 3.60 21,132 5.62
Certificates of deposit
less than $100,000 5.59 180,775 43.08 5.32 185,790 49.41
Certificates of deposit
greater than $100,000 (A) 5.59 81,847 19.50 5.32 51,200 13.62
NOW Accounts 1.32 37,781 9.00 1.32 35,339 9.40
Non-interest bearing deposits - 17,264 4.11 - 12,855 3.42
- ------ ---- - ------ ----
Total deposits at end of period 3.80% $419,671 100.00% 3.71% $375,983 100.00%
===== ======== ======= ===== ======== =======
<FN>
(A) Deposit balances in excess of $100,000 are not federally insured.
</FN>
</TABLE>
The certificates of deposit frequently are renewed at maturity rather than paid
out; a summary of certificates by contractual maturity at September 30, 2000 is
as follows:
<TABLE>
<S> <C> <C>
Years Ending September 30,
--------------------------
(in thousands)
Amount
2001 $195,775
2002 45,275
2003 17,447
2004 2,550
2005 1,575
2006 and after 0
-
Total $262,622
========
</TABLE>
Interest expense on deposits is comprised of the following:
<TABLE>
<S> <C> <C> <C>
Years Ended September 30,
-------------------------
(in thousands)
2000 1999 1998
---- ---- ----
Savings accounts $1,463 $1,464 $1,607
Money market accounts 954 655 417
Certificates less than $100,000 10,299 9,381 9,139
Certificates greater than
$100,000 2,269 1,672 1,180
NOW Accounts 326 344 372
--- --- ---
Total $15,311 $13,516 $12,715
======= ======= =======
</TABLE>
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, 2000 and 1999, such advances mature as follows:
<TABLE>
<S> <C> <C>
Due by September 30, Weighted Average Rate September 30, 2000
-----------------------------------------------------------------------------------------
(in thousands)
2001 6.51% $47,000
2002 - -
2003 - -
2004 4.50 98
2005 6.43 50,000
Thereafter 5.34 40,363
---- ------
Total FHLB advances 6.13% $137,461
===== =======
</TABLE>
Page 29
<PAGE>
<TABLE>
<S> <C> <C>
Due by September 30, Weighted Average Rate September 30, 1999
-----------------------------------------------------------------------------------------
(in thousands)
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
===== =======
</TABLE>
The Bank has included in the preceding table annually renewable lines of credit
totaling $75,000,000. The Bank, from time to time, has used the lines of credit
to meet liquidity needs. At September 30, 2000 and 1999, the balances
outstanding on the lines of credit were $6,000,000 and $24,500,000,
respectively, with interest rates at the overnight FHLB borrowing rate which was
6.77% at September 30, 2000.
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. 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, 2000, are approximately $8.6 million, of which $8.3 million
represents the base year amount and $316,000 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>
<S> <C> <C> <C>
Year Ended September 30,
-----------------------
2000 1999 1998
---- ---- ----
Current:
Federal $769 $1,021 $1,434
State 174 185 136
Deferred - Federal (362) (193) (1,929)
----- ----- -------
Total $581 $1,013 $(359)
=== ===== =====
</TABLE>
The provision (benefit) for income taxes differs from the statutory rate due to
the following (in thousands):
<TABLE>
<S> <C> <C> <C>
Year Ended September 30,
2000 1999 1998
---- ---- ----
Federal income tax (benefit) at
statutory rate $1,536 $1,897 $ (138)
Tax exempt interest, net (1,003) (1,013) (409)
State taxes, net of Federal benefit 115 122 90
Excess ESOP compensation expense (69) 23 42
Other, net (148) (16) 56
Increase in valuation allowance for
deferred tax assets 150 - -
--- - -
Total $581 $1,013 $ (359)
=== ===== =====
</TABLE>
The components of the net deferred tax liability (asset) are as follows (in
thousands):
<TABLE>
<S> <C> <C>
September 30,
2000 1999
---- ----
Deferred tax assets:
Loan fees and costs $(44) $(108)
ESOP funding difference (132) (131)
Recognition and retention plan (145) (153)
Deferred compensation (230) (195)
Foreclosed asset writedowns (8) (8)
Unrealized losses on available-for-sale (2,338) (1,805)
securities
Accrued hospitalization (52) (42)
Charitable contributions (1,371) (1,445)
Book bad debt reserves - loans (1,509) (1,088)
Intangibles amortization (101) (37)
Investment writedown (36) -
AMT credit carryforward (30) -
---- -
Gross deferred tax assets $(5,996) $(5,012)
-------- --------
Valuation allowance $150 $-
---- --
Net deferred tax asset $(5,846) $(5,012)
-------- --------
</TABLE>
Page 30
<PAGE>
<TABLE>
<S> <C> <C>
Deferred tax liabilities:
Depreciation $68 $91
Accretion 34 36
Tax bad debt reserves in excess of base 108 143
year
Title plant 26 26
-- --
Gross deferred tax liabilities 236 296
--- ---
Net deferred tax liability (asset) $(5,610) $(4,716)
======== ========
</TABLE>
Deferred income taxes reflect the net tax-effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Based on the Company's
history of prior operating earnings and its expectation of the future,
management believes that taxable income will more likely than not be sufficient
to realize the net deferred tax asset of $5.6 million at September 30, 2000. A
valuation allowance of $150,000 was established during the year ended September
30, 2000 to offset a portion of the charitable contribution carryforward that
management believes may not be realizable. Such charitable contribution
carryover will expire on September 30, 2003 if not utilized.
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. 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. In November
1999, the Company adopted the 2000 Stock Option Plan. The 2000 plan reserves an
additional 173,624 shares for issuance. At September 30, 2000, 183,977 shares of
the plans remain unawarded.
A summary of the status of the Company's Stock Option Plan as of September 30,
2000 and changes during the year is presented below:
<TABLE>
<S> <C> <C> <C> <C>
2000 1999
---- ----
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
Stock Options:
Outstanding at beginning of year 618,355 $11.68 - $ -
Granted 18,510 10.52 627,220 11.60
Forfeited (4,483) 9.78 (8,865) 11.75
------- ---- ------- -----
Outstanding at end of year 632,382 $9.98 618,355 $11.68
Exercisable at end of year 125,398 - -
Weighted-average fair value
of options granted $3.72 $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 5.8% in 2000; expected option life
of 10 years; and expected stock price volatility of 29.06% for 2000 awards;
expected dividend yield of 3.03%.
In October 1995, the FASB Issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement 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
No. 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 of SFAS No. 123. Had the grant-date fair-value provisions of SFAS
No. 123 been adopted, the Company would have recognized $513,000 in 2000 of
compensation expense related to options granted in 1999 under its Option Plan.
As a result, proforma net income of the Company would have been $3.6 million in
2000 and proforma diluted earnings per share would have been $0.74 in 2000. 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.
Page 31
<PAGE>
The following table summarizes all stock options outstanding for the Plan as of
September 30, 2000, segmented by range of exercise prices:
<TABLE>
<S> <C> <C> <C>
Outstanding
--------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Remaining
Number Price Contractual Life
------ ---------- ----------------
Stock Options:
$10.00-$10.12 1,045 $10.00 9.0 years
$10.13-$10.24 2,955 10.13 8.6
$10.25-$10.37 1,910 10.25 9.1
$10.38-$10.62 14,500 10.38 9.2
$10.63-$11.37 3,045 10.63 8.7
$11.38-$11.62 5,146 11.38 8.8
$11.63-$11.74 2,955 11.63 8.8
$11.75-$11.99 596,726 11.75 8.1
$12.00-$12.74 2,100 12.00 9.4
$12.75-$12.77 2,000 12.75 8.4
------- ----- ----
632,382 $9.98 8.8 years
======= ===== =========
</TABLE>
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 $3.8 million as of September 30, 2000, of which $1.6
million was for variable-rate loans. The balance of the commitments represent
fixed-rate loans with interest rates ranging from 7.1% to 9.5%. In addition, at
September 30, 2000, the Company had undisbursed loans in process for
construction loans of $13.5 million and $27.9 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, 2000, 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, 2000 and
1999.
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.
Page 32
<PAGE>
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.
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<S> <C> <C> <C> <C>
At September 30,
----------------
(in thousands)
2000 1999
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial Assets:
Cash and cash equivalents $6,295 $6,295 $4,177 $4,177
Securities available for sale 157,474 157,474 189,835 189,835
Securities held-to-maturity 30,336 28,129 30,332 28,315
Loans 415,105 415,802 364,190 360,489
Accrued interest receivable 5,401 5,401 4,769 4,769
Financial Liabilities:
Deposits with no stated maturity which
consist of savings, money market, NOW
and non-interest bearing deposits $160,279 $160,279 $138,993 $138,993
Certificates of deposit 259,392 257,346 236,990 234,737
Federal Home Loan Bank advances 137,461 136,767 155,980 155,174
Other borrowings 1,654 1,654 524 524
Accrued interest payable 2,472 2,472 1,317 1,317
Contractual Estimated Contractual Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Off balance sheet assets (liabilities):
Loan commitments $17,265 $259 $20,913 $314
Consumer lines of credit 16,297 - 15,541 -
Commercial lines of credit 11,558 1 6,893 1
</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, 2000, that the Bank meets all capital adequacy requirements to which it is
subject.
As of September 30, 2000, 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 33
<PAGE>
The Bank's actual capital amounts and ratios at September 30, 2000 and 1999 are
also presented in the following table (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000
(in thousands)
To be Well Capitalized
For Capital under prompt corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
------ ------- ------ -------- ------ --------
Risk-based Capital
(Total Capital to risk weighted assets) $62,307 17.2% $29,065 >8.0% $36,331 >10.0%
Tier I Capital
(to risk weighted assets) 57,986 16.0% 14,532 >4.0% 21,798 >6.0%
Core Capital
(Tier I Capital to total assets) 57,986 9.3% 18,812 >3.0% 31,353 >5.0%
Tangible Capital
(Tier I Capital to total assets) 57,986 9.3% 9,406 >1.5% N/A N/A
As of September 30, 1999
(in thousands)
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
<FN>
(1)Tangible and core capital are completed as a percentage of total assets of
$627 million and $596 million at September 30, 2000 and 1999, respectively.
Risk-based capital and Tier I capital is computed as a percentage of total
risk-weighted assets of $363 million and $307 million at September 30, 2000
and 1999, 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,
2000, 1999 and 1998.
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 $113,000, $182,000 and $88,000
for the years ended September 30, 2000, 1999 and 1998, 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 four
years, with a 25% 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 (9.5%, at September 30, 2000) and will be repaid
principally from the Company's contributions to the ESOP. The Company recognized
$273,000, $634,000, and $467,000 in compensation and benefit expense related to
the ESOP for the years ended September 30, 2000, 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 51,419 shares have been committed to be released in fiscal 2001. A
total of 51,419 and 55,704 shares were released in fiscal 1999 and fiscal 1998,
respectively.
14. Recent Accounting Pronouncements
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" and amended
again in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment to FASB No. 133." This
statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively)
Page 34
<PAGE>
referred to as derivatives) and for hedging activities. It required 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 September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement supercedes and replaces the guidance in Statement 125. It revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, although it carries over
most of Statement 125's provisions without reconsideration. The Statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001 and for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application of its accounting
provisions is not permitted. The Company has not yet determined the impact, if
any, of this statement on the Company's financial condition, equity, results of
operations, or disclosure.
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 $37,373, $31,000, and $29,173
for the years ended September 30, 2000, 1999, and 1998, respectively.
16. Subsequent Events
On November 10, 2000, Northeast Pennsylvania Financial Corp., acquired Security
of Pennsylvania Financial Corp. ("Security"), based in Hazleton, Pennsylvania,
the holding company of Security Savings Association of Hazleton, a
Pennsylvania-chartered savings and loan association ("Security Savings").
Pursuant to an Agreement and Plan of Merger, each share of the issued and
outstanding common stock, par value $0.01 per share, of Security is entitled to
receive $17.50 in cash. In addition, on November 10, 2000 Security Savings was
merged with and into First Federal Bank, a federally-chartered savings bank,
with First Federal being the surviving institution. The acquisition of Security
was accounted for as a purchase business combination. The following proforma
results of operations assume that the acquisition had been consummated at the
beginning of each respective period shown.
<TABLE>
<S> <C> <C>
Fiscal Year Ended
(in thousands)
September 30, 2000 September 30, 1999
------------------ ------------------
Net interest income $22,814 $22,065
Other income 2,269 2,309
Net income 4,182 5,315
Earnings per share - basic $0.90 $0.98
Earnings per share - diluted $0.86 $0.94
</TABLE>
Page 35
<PAGE>
17. Parent Company Financial Information
Condensed Statement of Financial Condition
<TABLE>
<S> <C> <C>
September 30,
-------------
(in thousands)
2000 1999
---- ----
Assets:
Cash $70 $503
Investment in Subsidiaries 56,944 56,475
Securities available for sale 14,346 15,474
Accrued interest receivable 281 330
Due from affiliates 823 879
Other Assets 3,805 1,964
----- -----
Total Assets $76,269 $75,625
======= =======
Liabilities and stockholders' equity:
Note payable 3,185 -
Other liabilities 109 149
--- ---
Total Liabilities 3,294 149
----- ---
Stockholders' equity:
Common stock 64 64
Additional paid-in-capital 62,164 62,119
Common stock acquired by stock benefit plans (6,221) (7,066)
Retained earnings-substantially restricted 33,207 30,818
Accumulated other comprehensive income (loss) (3,711) (2,874)
Treasury stock (12,528) (7,585)
-------- -------
Total stockholders' equity $72,975 $75,476
------- -------
Total Liabilities and Stockholder's Equity $76,269 $75,625
======= =======
</TABLE>
Condensed Statement of Operations
<TABLE>
<S> <C> <C> <C>
For the years ended September 30,
(in thousands)
2000 1999 1998
---- ---- ----
Income:
Interest income $1,059 $1,274 $833
Other income (59) 41 -
Equity in undistributed income of the
subsidiary 3,902 4,203 2,772
----- ----- -----
Total Income 4,902 5,518 3,605
----- ----- -----
Expenses:
Interest expense 153 - -
Other operating expenses 792 724 5,005
--- --- -----
Total Expense 945 724 5,005
--- --- -----
Income (loss) before income taxes 3,957 4,794 (1,400)
Income tax expense (benefit) 21 229 (1,353)
-- --- -------
Net income (loss) $3,936 $4,565 $(47)
====== ====== =====
</TABLE>
Page 36
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
For the Years Ended September 30,
(in thousands)
2000 1999 1998
---- ---- ----
Operating Activities:
Net Income (loss) $3,936 $4,565 $(47)
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income tax (benefit) provision (655) (5,053) 1,266
Funding of First Federal Charitable Foundation - - 4,761
Reduction in unallocated ESOP shares 417 634 467
Stock award expense 473 447 -
Amortization and accretion on:
Available-for-sale securities 8 181 14
(Gain) loss on sale of:
Available-for-sale securities 14 (40) -
Changes in assets and liabilities:
Increase in other assets (1,799) (394) (1,126)
Increase (decrease) in other liabilities (40) (147) 296
---- ----- ---
Net cash provided by operating activities $2,354 $ 193 $5,631
------ ----- ------
Investing Activities:
Capital investment in subsidiary bank $- $- $27,255
(Increase) decrease in investment in subsidiaries (469) 1,324 (57,799)
Proceeds from sale of:
Available-for-sale securities 1,048 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 (61) (12,136) (25,821)
---- -------- --------
Net cash provided by (used in) investing activities $518 $10,973 $ (56,562)
---- ------- ----------
Financing Activities:
Borrowings of note payable $3,185 $- $-
Purchase of common stock for stock incentive plan - (3,312) -
Purchase of treasury stock (4,943) (7,585) -
Cash dividend on common stock (1,547) (955) -
Net proceeds from issuance of common stock - - 52,120
- - ------
Net cash provided by (used in) financing activities $(3,305) $(11,852) $52,120
-------- --------- -------
Increase (decrease) in cash and cash equivalents (433) (686) 1,189
Cash and cash equivalents, beginning of year 503 1,189 -
--- ----- -
Cash and cash equivalents, end of year $70 $503 $1,189
=== ==== ======
</TABLE>
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<PAGE>
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<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 for the year ended
September 30, 2000.
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, 2000.
/s/ E. Lee Beard /s/ Patrick J. Owens, Jr.
----------------------- --------------------------
E. Lee Beard Patrick J. Owens, Jr.
President & Vice President, Treasurer,
Chief Executive Officer & Chief Financial Officer
Page 39
<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, 2000 and 1999 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, 2000.
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, 2000 and 1999 and the results of its operations and its cash
flows for each of the years in the three year period ended September 30, 2000,
in conformity with generally accepted accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
------------------------
KPMG LLP
Philadelphia, Pennsylvania
October 23, 2000
Page 40
