UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-13793
NORTHEAST PENNSYLVANIA FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1504091
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
12 E. BROAD STREET, HAZLETON, PENNSYLVANIA 18201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(570) 459-3700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
--------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: The Registrant had
5,536,149 shares of Common Stock outstanding as of February 7, 2000.
<PAGE>
TABLE OF CONTENTS
Item
No.
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition at
December 31, 1999 (unaudited) and September 30, 1999................. 1
Consolidated Statements of Operations for the Three Months Ended
December 31, 1999 and 1998 (unaudited)............................... 2
Consolidated Statement of Comprehensive Income for the Three Months
Ended December 31, 1999 and 1998 (unaudited)......................... 3
Consolidated Statements of Changes in Equity for the Years Ended
September 30, 1999, 1998 and 1997 and the Three Months Ended
December 31, 1999 (unaudited)........................................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998(unaudited)................................ 5
Notes to Consolidated Financial Statements (unaudited)............... 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................12
Item 3 Quantitative and Qualitative Disclosures about Market Risk...........16
Part II - OTHER INFORMATION
1 Legal Proceedings....................................................17
2 Changes in Securities and Use of Proceeds............................17
3 Defaults Upon Senior Securities......................................17
4 Submission of Matters to a Vote of Security Holders..................17
5 Other Information....................................................17
6 Exhibits and Reports on Form 8 - K................................17-18
Signatures
<PAGE>
<TABLE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Financial Condition
December 31, 1999 (unaudited) and September 30, 1999
(in thousands)
December 31, September 30,
1999 1999
---- ----
Assets (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 3,283 $ 4,177
Securities available-for-sale 193,937 189,835
Securities held-to-maturity (estimated fair value of $27,455 at
December 1999 and $28,315 in September 1999) 30,330 30,332
Loans (less allowance for loan losses of $3,092 for December 1999
and $2,924 for September 1999) 382,947 364,190
Accrued interest receivable 5,219 4,769
Assets acquired through foreclosure 217 98
Property and equipment, net 9,661 9,868
Other assets 10,058 8,956
------ -----
Total assets $ 635,652 $ 612,225
========= =========
Liabilities and Equity
Deposits $ 375,158 $ 375,983
Federal Home Loan Bank advances 182,975 155,980
Other borrowings 524 524
Advances from borrowers for taxes and insurance 875 1,040
Accrued interest payable 1,399 1,317
Other liabilities 1,828 1,905
----- -----
Total liabilities $ 562,759 $ 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 62,191 62,119
Common stock acquired by stock benefit plans (6,780) (7,066)
Retained earnings - substantially restricted 31,616 30,818
Accumulated other comprehensive loss (5,185) (2,874)
Treasury stock, at cost (769,567 shares) (9,013) (7,585)
------- -------
Total equity $ 72,893 $75,476
-------- -------
Total liabilities and equity $635,652 $ 612,225
======== =========
</TABLE>
1
<PAGE>
<TABLE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Operations
For the Three Months Ended December 31, 1999 and 1998 (unaudited)
(in thousands)
<S> <C> <C>
For the Three months ended
December 31,
Interest Income: 1999 1998
---- ----
(unaudited)
Loans $7,290 $5,742
Mortgage-related securities 914 1,205
Investment securities:
Taxable 1,648 1,364
Non-taxable 877 657
--- ---
Total interest income 10,729 8,968
Interest Expense:
Deposits 3,765 3,317
Federal Home Loan Bank advances and other 2,239 1,319
----- -----
6,004 4,636
Total interest expense
Net interest income 4,725 4,332
Provision for loan losses 205 47
--- --
Net interest income after provision for loan losses 4,520 4,285
Non-interest Income:
Service charges and other fees 315 217
Other income 173 85
Insurance premium income 58 45
Gain (loss) on sale of:
Real estate owned (40) (16)
Loans 9 19
Available-for-sale securities (14) 34
---- --
Total non-interest income 501 384
Non-interest Expense:
Salaries and net employee benefits 1,967 1,718
Occupancy costs 469 419
Data processing 122 125
Professional fees 158 223
Federal Home Loan Bank service charges 165 101
Other 831 518
--- ---
Total non-interest expense 3,712 3,104
Income before income taxes 1,309 1,565
Income taxes 163 387
--- ---
Net income $ 1,146 $ 1,178
======= =======
Earnings per share - basic $ 0.22 $0.20
====== =====
Earnings per share - diluted $ 0.22 $0.19
====== =====
</TABLE>
2
<PAGE>
<TABLE>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Comprehensive Income
For the Three Months Ended December 31, 1999 and 1998 (unaudited)
(in thousands, except per share data)
For the Three Months Ended
December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net Income $ 1,146 $ 1,178
======= =======
Other comprehensive loss, net of tax
Unrealized losses on securities:
Unrealized holding losses arising during the period $ (2,320) $ (326)
Less: Reclassification adjustment for gains included in net
income (9) 22
--- --
Other comprehensive loss $ (2,311) $ (304)
Comprehensive income (loss) $ (1,165) $ 874
========= =====
</TABLE>
3
<PAGE>
<TABLE>
Northeast Pennsylvania Financial Corp.
Consolidated Statements of Changes in Equity
For the Three Years Ended September 30, 1999,1998 and 1997
and the Three Months Ended December 31, 1999 (unaudited)
(in thousands)
Common Stock Accumulated
Additional Acquired by Other
Common Paid In stock benefit Retained Comprehensive Treasury Total
Stock Capital plans Earnings income(loss) Stock Equity
----- ------- ----- -------- ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1996 $ - $ - $ - $ 25,874 $ 253 $ - $ 26,127
Net changes in gains (losses) on
securities available for sale, net of tax 1,030 1,030
Net Income 1,381 1,381
------ ------- -------- -------- --------- ------- --------
Balance September 30, 1997 $ - $ - $ - $ 27,255 $ 1,283 $ - $ 28,538
Issuance of Common Stock ($.01 par value;
16,000,000 authorized shares;
6,427,350 shares issued) 64 64
Additional paid-in Capital 61,959 61,959
Unearned Employee Stock Ownership
Plan (ESOP) shares (5,142) (5,142)
ESOP shares committed to be released 124 343 467
Net changes in gains (losses) on
securities available for sale, net of tax 1,595 1,595
Net loss (47) (47)
------ ------- -------- -------- --------- ------- --------
Balance September 30, 1998 $ 64 $62,083 $ (4,799) $ 27,208 $ 2,878 $ - $ 87,434
Unearned stock awards (3,312) (3,312)
ESOP shares committed to be released 77 557 634
Stock awards (41) 488 447
Net changes in gains (losses) on
securities available for sale, net of tax (5,752) (5,752)
Treasury stock at cost, (626,667 shares) (7,585) (7,585)
Cash dividend paid (955) (955)
Net income 4,565 4,565
------ ------- -------- -------- --------- -------- --------
Balance September 30, 1999 $ 64 $62,119 $(7,066) $ 30,818 $ (2,874) $(7,585) $ 75,476
ESOP shares committed to be released 85 128 213
Stock awards (13) 158 145
Net changes in gains (losses) on
securities available-for-sale, net of tax (2,311) (2,311)
Treasury stock at cost, (142,900 shares) (1,428) (1,428)
Cash dividend paid (348) (348)
Net income 1,146 1,146
------ ------- -------- -------- --------- -------- --------
Balance, December 31, 1999 $ 64 $62,191 $(6,780) $ 31,616 $ (5,185) $(9,013) $ 72,893
====== ======= ======== ======== ========= ======== ========
</TABLE>
4
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 1999 and 1998 (unaudited)
(in thousands)
<TABLE>
<S> <C> <C>
For the Three Months Ended
December 31,
1999 1998
---- ----
Operating Activities: (unaudited)
Net Income $ 1,146 $ 1,178
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for REO loss 10 3
Provision for loan losses 205 47
Depreciation 275 198
Deferred income tax provision 584 142
ESOP expense 213 -
Stock award expense 145 203
Amortization and accretion on:
Held-to-maturity securities - 17
Available-for-sale securities 19 90
Amortization of deferred loan fees (65) (116)
(Gain) loss on sale of:
Assets acquired through foreclosure 40 16
Loans (9) (19)
Available-for-sale securities 14 (34)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (450) 283
Increase in other assets (234) (110)
Increase (decrease) in accrued interest payable 82 (202)
Decrease in accrued income taxes payable (519) (215)
Increase in other liabilities 442 558
--- ---
Net cash provided by operating activities $1,898 $2,039
Investing Activities:
Net increase in loans $(19,732) $(5,053)
Proceeds from sale of:
Available-for-sale securities 1,048 1,305
Assets acquired through foreclosure 22 102
Loans 653 3,525
Proceeds from repayments of held-to-maturity securities 2 15,953
Proceeds from repayments of available-for-sale securities 2,061 28,612
Purchase of:
Held-to-maturity securities - (9,564)
Available-for-sale securities (9,557) (29,836)
Office properties and equipment (68) (332)
Federal Home Loan Bank stock (1,450) (275)
------- -----
Net cash provided by (used in) investing activities $(27,021) $4,437
Financing Activities:
Net decrease in deposit accounts $(825) $(2,827)
Net increase (decrease) in Federal Home Loan Bank short-term advances (13,000) 5,500
Borrowings of Federal Home Loan Bank long-term advances 40,000 -
Repayments of Federal Home Loan Bank long-term advances (5) (4)
Net increase (decrease) in advances from borrowers for taxes and insurance (165) 520
</TABLE>
5
<PAGE>
Northeast Pennsylvania Financial Corp.
Consolidated Statement of Cash Flows
For the Three Months Ended December 31, 1999 and 1998 (unaudited)
(in thousands)
<TABLE>
For the Three Months
Ended December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Net decrease in other borrowings - (307)
Purchase of common stock for stock incentive plan - (3,312)
Purchase of treasury stock (1,428) -
Cash dividend on common stock (348) -
----- -
Net cash provided by (used in) financing activities $24,229 $(430)
Increase (decrease) in cash and cash equivalents (894) 6,046
Cash and cash equivalents, beginning of year 4,177 3,053
----- -----
Cash and cash equivalents, end of year $3,283 $9,099
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,922 $4,838
====== ======
Income taxes $97 $476
=== ====
Supplemental disclosure - non-cash and financing information:
Transfer from loans to real estate owned $191 $58
==== ===
Net change in unrealized losses on securities
available-for-sale, net of tax $(2,311) $(304)
======== ======
</TABLE>
6
<PAGE>
Northeast Pennsylvania Financial Corp.
Notes to Consolidated Financial Statements (unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statements Presentation
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not
include information or footnotes necessary for a complete presentation
of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. However, all
normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial statements, have
been included. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in
the Company's Annual Report for the period ended September 30, 1999.
The results for the three months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ended September 30, 2000.
Business
Northeast Pennsylvania Financial Corp. (the "Company") is the holding
company for First Federal Bank. The Company's principal subsidiary,
First Federal Bank, serves Northeastern and Central Pennsylvania
through thirteen full service office locations and a loan production
office. The Bank provides a wide range of banking services to
individual and corporate customers. The Company and the Bank are
subject to competition from other financial institutions and other
companies that provide financial services. The Company and the Bank are
subject to the regulations of certain federal agencies and undergo
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. , Northeast
Pennsylvania Trust Co. and FIDACO, Inc.. First Federal Bank, Northeast
Pennsylvania Trust Co., and Abstractors, Inc. , 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. 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. FIDACO, Inc. is an
inactive subsidiary of First Federal Bank and its only major asset is
an investment in Hazleton Community Development Corporation.
Earnings per Share
Earnings per share (EPS), basic and diluted, were $0.22 and $0.22,
respectively, for the three months ended December 31, 1999 compared to
$0.20 and $0.19, respectively, for the three months ended December 31,
1998.
7
<PAGE>
The following table presents the reconciliation of the numerators and
denominators of the basic and diluted EPS computations.
<TABLE>
Three months ended
December 31,
1999 1998
---- ----
(unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C>
Basic:
Net Income $1,146 $1,178
====== ======
Weighted average shares issued 5,656,068(1) 5,826,532(1)
Less: Weighted Treasury shares (652,972) -
Plus: ESOP shares released
or committed to be released 96,411 42,849
------ ------
5,099,507 5,869,381
Earnings per share - basic $0.22 $0.20
===== =====
Three months ended
December 31,
1999 1998
---- ----
(unaudited)
(Dollars in thousands, except per share data)
Diluted:
Net Income $1,146 $1,178
====== ======
Basic weighted shares outstanding 5,099,507 5,869,381
Dilutive Instruments:
Dilutive effect of outstanding stock options - 2,573
Dilutive effect of stock awards 193,466 174,821
------- -------
5,292,973 6,046,775
Earnings per share - diluted $0.22 $0.19
===== =====
<FN>
(1)Weighted average shares is net of ESOP shares and average weighted
shares purchased for stock awards of 514,188 and 257,094 at December
31, 1999 and 514,188 and 86,630 at December 31, 1998, respectively
</FN>
</TABLE>
2. 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." This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. If
certain conditions are met, a derivative may be specifically designated
as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of certain foreign currency exposures. This
8
<PAGE>
Statement "as amended" becomes effective for fiscal years beginning
after December 15, 1999. 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.
3. Conversion to Stock Form of Ownership
The Company is a business corporation formed at the direction of the
Bank under the laws of Delaware on December 16, 1997. On March 31,
1998, the Company issued 6,427,350 shares, par value $.01 per share
(the "Common Stock"), including 514,188 shares to the Bank's Employee
Stock Ownership Plan and related trust ("ESOP") and a contribution of
476,100 shares of Common Stock to The First Federal Charitable
Foundation (the "Foundation"). The Conversion resulted in net proceeds
of $52.1 million, after expenses of $2.2 million.
The Bank established a liquidation account at the time of the
Conversion in an amount equal to the equity of the Bank as of the date
of its latest balance sheet date, September 30, 1997, contained in the
final Prospectus used in connection with the Conversion. In the
unlikely event of a complete liquidation of the Bank, (and only in such
an event), eligible depositors who continue to maintain accounts at the
Bank shall be entitled to receive a distribution from the liquidation
account. The amount of the liquidation account decreases to the extent
the balances of eligible deposits decrease. The liquidation account
approximated $10.7 million at September 30, 1999.
The Company may not declare nor pay dividends on its stock if such
declaration and payment would violate statutory or regulatory
requirements.
In addition to the 16,000,000 authorized shares of Common Stock, the
Company authorized 2,000,000 shares of preferred stock with a par value
of $0.01 per share (the "Preferred Stock"). The Board of Directors is
authorized, subject to any limitations by law, to provide for the
issuance of the shares of Preferred Stock in series, to establish from
time to time the number of shares to be included in each such series,
and to fix the designation, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or
restriction thereof. As of December 31, 1999, there were no shares of
Preferred Stock issued.
9
<PAGE>
<TABLE>
4. Loans
Loans are summarized as follows: December 31, September 30,
1999 1999
---- ----
(unaudited)
(Dollars in thousands)
<S> <C> <C>
Real Estate loans:
One-to four-family $209,791 $196,885
Multiple family and commercial 32,691 31,497
Construction 3,632 3,983
----- -----
Total real estate loans 246,114 232,365
------- -------
Consumer Loans:
Home equity loans and lines of credit 70,981 70,118
Automobile 37,623 34,619
Education 3,008 2,796
Unsecured lines of credit 1,816 1,744
Other 5,583 5,571
----- -----
Total consumer loans 119,011 114,848
------- -------
Commercial loans 22,340 21,262
------ ------
Total loans 387,465 368,475
------- -------
Less:
Allowance for loan losses (3,092) (2,924)
Deferred loan origination fees (1,426) (1,361)
------- -------
Total loans, net $382,947 $364,190
======== ========
</TABLE>
<TABLE>
Allowance for loan losses is summarized as follows (in thousands):
<S> <C> <C> <C>
For the three For the three
months ended For the year ended months ended
December 31, 1999 September 30, 1999 December 31, 1998
----------------- ------------------ -----------------
(unaudited) (unaudited)
Balance, beginning of period $2,924 $2,273 $2,273
Charge-offs (38) (101) (35)
Recoveries 1 5 1
Provision for loan losses 205 747 47
--- --- --
Balance, end of period $3,092 $2,924 $2,286
====== ====== ======
</TABLE>
<TABLE>
5. Deposits
Deposits consist of the following major classifications (in thousands):
December 31, 1999 September 30, 1999
----------------- ------------------
(unaudited)
Percent Percent
Amount of Total Amount of Total
------------- ------------- -------------- ------------
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Savings accounts (passbook, statement, clubs) $67,938 18.11% $69,667 18.53%
Money market accounts 21,240 5.66% 21,132 5.62%
Certificates of deposit less than $100,000 183,198 48.83% 185,790 49.41%
Certificates of deposit greater than $100,000(1) 51,021 13.60% 51,200 13.62%
NOW Accounts 37,235 9.93% 35,339 9.40%
Non-interest bearing deposits 14,526 3.87% 12,855 3.42%
------ ----- ------ -----
Total deposits at end of period $375,158 100.00% $375,983 100.00%
======== ======= ======== =======
<FN>
(1) Deposit balances in excess of $100,000 are not federally insured.
</FN>
</TABLE>
10
<PAGE>
Item 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information, this 10-Q may include certain
forward-looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Bank's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices. Further description of the risks and uncertainties to the business are
included in detail in Section B, Management Strategy; and Section D, Liquidity
and Capital Resources.
A. General
The Company is the holding company for First Federal Bank (the "Bank"), a
federally chartered capital stock savings bank regulated by the Office of Thrift
Supervision ("OTS"). The Company does not transact any material business other
than through the Bank. The Bank's results of operations are dependent primarily
on net interest income, which is the difference between the income earned on its
loan and investment portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by the
Bank's provision for loan losses, loan and security sales, service charges and
other fee income, and non-interest expense. The Bank's non-interest expense
principally consists of compensation and employee benefits, office occupancy and
equipment expense, professional fees, federal deposit insurance premiums, data
processing, and advertising and business promotion expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
In June 1999, the Company received approval from the Pennsylvania Department of
Banking to form a trust company, Northeast Pennsylvania Trust Co. (the "Trust").
The Trust began operations in the first fiscal quarter of 2000 and has been well
received by the markets served by the Bank. The Trust will serve current
customers and potentially other financial institutions' customers, with trust,
estate and asset management services and products.
B. Management Strategy
The Bank's operating strategy is that of a community-based bank, offering a wide
variety of savings products to its retail customers, while concentrating on
residential and consumer lending and, to a lesser extent, construction lending
and small business and municipal commercial lending. In order to promote
long-term financial strength and profitability, the Bank's operating strategy
has focused on: (i) maintaining strong asset quality by originating one-to
four-family loans in its market area; (ii) increasing profitability by
emphasizing higher-yielding consumer and commercial loans; (iii) managing its
interest rate risk by emphasizing consumer and commercial loans, in addition to
shorter-term, fixed-rate, one-to four-family loans; limiting its retention of
11
<PAGE>
newly-originated longer-term fixed-rate one-to four-family loans; soliciting
longer-term deposits; utilizing longer-term advances from the Federal Home Loan
Bank of Pittsburgh ("FHLB"); and investing in investment and mortgage-related
securities having shorter estimated durations; (iv) meeting the banking needs of
its customers through expanded products and improved delivery systems by taking
advantage of technological advances; and (v) maintaining a strong regulatory
capital position.
During the quarter the Bank continued to diversify and expand its loan products
to better serve its customer base by placing a greater emphasis on consumer
lending and commercial lending, primarily to small businesses and
municipalities.
C. Non-Performing Assets
<TABLE>
The following table presents information regarding the Bank's non-performing
assets at the dates indicated (dollars in thousands):
December 31, September 30,
1999 1999
---- ----
(unaudited)
<S> <C> <C>
Non-performing assets:
Non-accrual loans $1,902 $1,371
Real estate owned and other repossessed assets 217 98
--- --
Total non-performing assets $2,119 $1,469
====== ======
Total non-performing loans as a percentage of total loans 0.50% 0.38%
Total non-performing assets as a percentage of total assets 0.33% 0.24%
</TABLE>
The increase in non-performing loans is due to a participation loan secured by
commercial real estate, which has been on the books of the Bank for
approximately seven years. The borrower is experiencing cash flow difficulty
arising from other facilities which they own. Management of the Bank is working
closely with the borrower in order to satisfactorily resolve the situation.
Currently, management does not expect the loan to result in a loss to the Bank.
D. Liquidity and Capital Resources
The Bank's primary sources of funds on a long-term and short-term basis are
deposits, principal and interest payments on loans, mortgage-backed and
investment securities, and FHLB advances. The Bank uses the funds generated to
support its lending and investment activities as well as any other demands for
liquidity such as deposit outflows. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows, mortgage prepayments
and the exercise of call features are greatly influenced by general interest
rates, economic conditions and competition. The Bank has continued to maintain
the required levels of liquid assets as defined by OTS regulations. This
requirement of the OTS, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The Bank's current required liquidity
ratio is 4.0%. At December 31, 1999 and 1998, the Bank's liquidity ratios were
5.1% and 9.0%, respectively.
At December 31, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $57.7 million, or 9.3% of total
adjusted assets, which is above the required level of $9.3 million, or 1.5%; a
core capital level of $57.7 million, or 9.3% of total adjusted assets, which is
above the required level of $18.6 million, or 3.0%; and a risk-based capital of
12
<PAGE>
$61.8 million, or 18.9% of risk-weighted assets, which is above the required
level of $26.2 million, or 8.0%.
The Bank's most liquid assets are cash and cash equivalents and its investment
and mortgage-related securities available-for-sale. The levels of these assets
are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At December 31, 1999, cash and cash
equivalents and investment and mortgage-related securities available-for-sale
totaled $197.2 million, or 31.0% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At December 31, 1999, the Bank had $183.0 million in
advances outstanding from the FHLB, and had an overall borrowing capacity from
the FHLB of $271.5 million. Depending on market conditions, the pricing of
deposit products and FHLB advances, the Bank may continue to rely on FHLB
borrowings to fund asset growth.
At December 31, 1999, the Bank had commitments to originate and purchase loans
and unused outstanding lines of credit and undisbursed proceeds of construction
mortgages totaling $39.8 million. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificate accounts,
including Individual Retirement Account ("IRA") and KEOGH accounts, which are
scheduled to mature in less than one year from December 31, 1999, totaled $180.6
million. The Bank expects that substantially all of the maturing certificate
accounts, with the exception of jumbo certificates of deposit, will be retained
by the Bank at maturity. At December 31, 1999, the Bank had $38.7 million in
jumbo certificates, the majority of which are deposits from local school
districts and municipalities.
At December 31, 1999, the Bank had total equity, determined in accordance with
generally accepted accounting principles, of $54.7 million, or 8.8%, 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% is considered to be "well-capitalized"
pursuant to OTS regulations.
E. Comparison of Financial Condition at December 31, 1999 and September 30, 1999
Total assets increased $23.4 million from $612.2 million at September 30, 1999
to $635.7 million at December 31, 1999. The growth in assets was primarily due
to increases in loans receivable, investment securities and other assets, which
were funded by increases in FHLB advances.
Securities classified as available-for-sale securities increased $4.1 million,
from $189.8 million at September 30, 1999 to $193.9 million at December 31,
1999. The increase was primarily attributable to the effect of security
purchases, net of unrealized gain/loss on available-for-sale securities.
Loans increased $18.8 million to $382.9 million at December 31, 1999. This was
primarily due to a $12.9 million increase in one-to four-family real estate
loans, as a result of loan purchases from other financial institutions. Consumer
loans, other than home equity loans and lines of credit, increased $3.2 million
due to increased indirect auto loan originations. Multiple family and commercial
real estate loans increased $1.2 million due to marketing efforts and
competitive pricing of products. Commercial loans increased $1.1 million due to
competitive pricing of products.
13
<PAGE>
Other assets increased $1.1 million to $10.1 million at December 31, 1999. This
change was primarily due to an $865,000 increase in the deferred income tax
benefit resulting from a decline in unrealized gain/loss an available-for-sale
securities.
FHLB advances increased $27.0 million from $156.0 million at September 30, 1999
to $183.0 million at December 31, 1999. This was a result of management's
utilization of FHLB borrowings to fund asset growth. FHLB borrowings have been
invested at yields higher than the cost of the borrowed funds thereby increasing
net interest income.
Total equity decreased $2.6 million to $72.9 million at December 31, 1999. This
decrease in equity resulted primarily from a $2.3 million increase in unrealized
losses on securities reflected in accumulated other comprehensive loss.
Contributing to this decline was the repurchase of 142,900 shares by the Company
during the quarter at a cost of $1.4 million. These decreases were partially
offset by retention of earnings for the period.
F. Comparison of Operating Results for the Three Months ended December 31, 1999
and December 31, 1998
General. The Company had net income of $1.1 million for the three months ended
December 31, 1999, compared to net income of $1.2 million for the three months
ended December 31, 1998, a decrease of $32,000, or 2.7%. This decrease was
primarily attributable to a $1.4 million rise in interest expense, as well as a
$608,000 increase in non-interest expense, offset by increases in interest
income and non-interest income of $1.8 million and $117,000, respectively.
Interest Income. Total interest income increased $1.8 million, or 19.6%, from
$9.0 million for the three months ended December 31, 1998 to $10.7 million for
the three months ended December 31, 1999. This was primarily due to a $94.0
million, or 18.6%, increase in the average balance of interest earning assets.
Specifically, interest income on loans increased $1.5 million from $5.7 million
for the period ending December 31, 1998 to $7.3 million. This was due to a
$710,000 increase in interest income on real estate loans, due to a $46.6
million increase in the average balance of these loans. Interest income on
consumer loans increased $651,000 due to a $32.4 million increase on the average
balance of these loans. Interest income on commercial loans increased $186,000
due to an $11.3 million increase in the average balance of these loans. Interest
income on investment securities increased $504,000 to $2.5 million for the three
months ended December 31, 1999 primarily due to a $27.0 million increase in the
average balance of such securities.
Interest Expense. Interest expense increased $1.4 million, or 29.5%, from $4.6
million to $6.0 million for the three months ended December 31, 1998 and
December 31, 1999, respectively. The contributing factor for the increase in
interest expense was a $920,000 increase in borrowings which was primarily the
result of a $63.9 million increase in the average balance of FHLB advances and
other borrowings, which increased from $100.0 million at December 31, 1998 to
$163.8 million at December 31, 1999, as well as an 18 basis point increase in
the average rate. The increase in FHLB advances reflects management's decision
to utilize FHLB advances to fund asset growth. Contributing to this change was a
$397,000 increase in interest expense on certificates of deposit, which was the
result of a $38.4 million increase in the average balance of these accounts.
14
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses for the three
months ended December 31, 1999 was $205,000 compared to $47,000 for the three
months ended December 31, 1998. The increase in the provision was a result of
the $18.8 million increase in outstanding loan balances from September 1999 to
December 1999. From September 1998 to December 1998 outstanding loans increased
by $1.6 million. The provision for loan losses increases the allowance for loan
losses. The allowance is maintained at a level that management considers
adequate to provide for estimated losses based upon an evaluation of known and
inherent risks in the loan portfolio. Loan losses, other than those incurred on
loans held for sale, are charged directly against the allowance and recoveries
on previously charged-off loans are added to the allowance. Management's
evaluation is based upon, among other things, delinquency trends, the volume of
non-performing loans, prior loss experience of the portfolio, current economic
conditions, and other relevant factors. Although management believes it has used
the best information available to it in making such determinations, and that the
allowance for loan losses is adequate, future adjustments to the allowance may
be necessary, and net income may be adversely affected if circumstances differ
substantially from the assumptions used in determining the level of the
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the 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.
Non-interest Income. Non-interest income increased $117,000 from $384,000 to
$501,000, for the three months ended December 31, 1999. The increase in
non-interest income was primarily due to a $98,000 increase in service charges
and other fees from December 1998 to December 1999. This increase is
attributable to a larger customer base at December 1999 due to additional
branches from December 1998. Other income increased $88,000 due to increases in
rental income. Contributing to these increases was a $98,000 increase in service
charges and other fees resulting from increased customer activity on the various
deposit and loan accounts. These increases were offset by a $14,000 loss on
available-for-sale securities for the three months ended December 31, 1999, as
compared to a gain of $34,000 at December 31, 1998. The loss on real estate
owned increased $24,000 from a loss of $16,000 to a loss of $40,000 at December
31, 1999.
Non-interest Expense. Total non-interest expense increased from $3.1 million for
the three months ended December 31, 1998 to $3.7 million for the three months
ended December 31, 1999. This increase was due primarily to an increase in
compensation and employee benefits of $249,000, for additional staffing
resulting from the opening of three branches since December 1998. Other
non-interest expense increased $313,000, or 60.4%, primarily due to amortization
of goodwill associated with branch and subsidiary acquisitions, increased
marketing efforts of deposit and loan products and a general increase in various
operating expenses such as supplies and postage. FHLB service charges increased
$64,000 mainly due to increased charges for higher ATM volume. Occupancy expense
increased $50,000 due to branch expansion.
Income Taxes. The Company had an income tax provision of $163,000 for the three
months ended December 31, 1999, compared to a provision of $387,000 for the
three months ended December 31, 1998 resulting in effective tax rates of 12.5%,
and 24.7%, respectively. The change in income tax expense was attributable to
increased tax-free security purchases.
15
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1999, there have been no material changes
in the quantative and qualitative disclosures about market
risks presented in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
16
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the
Company's financial condition or results of operation.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
3.1 Certificate of Incorporation of Northeast Pennsylvania
Financial Corp.*
3.2 Bylaws of Northeast Pennsylvania Financial Corp.*
4.0 Form of Stock Certificate of Northeast Pennsylvania
Financial Corp.*
11.0 Statement regarding Computation of Per Share Earnings
(See Notes to Consolidated Financial Statements)
27.0 Financial Data Schedule (submitted only with filing in
electronic format)
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, and any amendments
thereto, Registration No. 333-43281.
(B) Reports on Form 8-K
On October 18, 1999, the Company filed an 8-K to announce the date,
time and place of its 2000 Annual Meeting of Shareholders. The press
release announcing the date, time and place of the Company's Annual
Meeting was filed by Exhibit.
17
<PAGE>
On November 19, 1999, the Company filed an 8-K to announce it had
received regulatory clearance to repurchase 5% of its outstanding
shares. The press release announcing the receipt of regulatory
clearance was filed by Exhibit.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST PENNSYLVANIA
FINANCIAL CORP.
Date: February 10, 2000 By: /s/ E. Lee Beard
E. Lee Beard
President and Chief Executive Officer
Date: February 10, 2000 By: /s/ Patrick J. Owens, Jr.
Patrick J. Owens, Jr.
Treasurer
<PAGE>
Exhibit Index
27.0 Financial Data Schedule (submitted only with filing in electronic format)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the form 10-Q and is
qualified in its entirety by reference to the unaudited financial statements
contained therein.
</LEGEND>
<CIK> 0001050996
<NAME> Northeast Pennsylvania Financial Corp.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Sep-30-2000
<PERIOD-START> Oct-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,013
<INT-BEARING-DEPOSITS> 1,270
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 193,937
<INVESTMENTS-CARRYING> 30,330
<INVESTMENTS-MARKET> 27,455
<LOANS> 382,947
<ALLOWANCE> 3,092
<TOTAL-ASSETS> 635,652
<DEPOSITS> 375,158
<SHORT-TERM> 12,024
<LIABILITIES-OTHER> 4,102
<LONG-TERM> 171,475
0
0
<COMMON> 64
<OTHER-SE> 72,829
<TOTAL-LIABILITIES-AND-EQUITY> 635,652
<INTEREST-LOAN> 7,290
<INTEREST-INVEST> 2,525
<INTEREST-OTHER> 914
<INTEREST-TOTAL> 10,729
<INTEREST-DEPOSIT> 3,765
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<LOAN-LOSSES> 205
<SECURITIES-GAINS> (14)
<EXPENSE-OTHER> 3,712
<INCOME-PRETAX> 1,309
<INCOME-PRE-EXTRAORDINARY> 1,309
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,146
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 7.46
<LOANS-NON> 1,902
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 2,924
<CHARGE-OFFS> (38)
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<ALLOWANCE-DOMESTIC> 3,085
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<ALLOWANCE-UNALLOCATED> 7 <F2>
<FN>
1. Allowance for loan loss at end of period includes an increase in the
allowance through the provision for loan losses.
2. All unallocated is for domestic loans.
</FN>
</TABLE>
