SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
OR
[ } Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission File No. 333-57277
Nittany Financial Corp.
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2925762
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(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
116 East College Avenue, State College, Pennsylvania 16801
- ---------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code (814) 234-7320
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Securities registered under to Section 12(b) of the Exchange Act: None
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Securities registered under to Section 12(g) of the Exchange Act:
None
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 .
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $200,000
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, based on the average bid and asked price of
the Registrant's Common Stock on March 30, 1999 was $4.6 million.
As of March 30, 1999, there were issued and outstanding 577,436 shares of
the Registrant's Common Stock.
Transition Small Business Disclosure Format (check one): YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Nittany Financial Corp. (the "Company") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Company's filings with the securities and exchange commission (including
this Annual Report on Form 10-KSB and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the private
securities litigation reform act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
Federal Reserve system, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and savings habits; and the success of the Company at managing the risks
involved in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Business
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Business of the Company
Nittany Financial Corp. was incorporated under the laws of the
Commonwealth of Pennsylvania on December 8, 1997, primarily to own all of the
outstanding shares of capital stock of a federal stock savings bank to be named
Nittany Bank (the "Bank"). On September 14, 1998, the Office of Thrift
Supervision (the "OTS") granted the Company the necessary approvals to acquire
the capital stock of the Bank and to become a savings and loan holding company
of the Bank. The Bank opened for business on October 26, 1998, and currently has
two branches in State College, Pennsylvania. Thus, the Company had only two
months of substantive operations in 1998.
The Company is a unitary savings and loan holding company which, under
existing laws, generally is not restricted in the types of business activities
in which it may engage provided that the Bank retains a specified amount of its
assets in housing-related investments. The Company currently conducts no
significant business or operations of its own other than owning all of the
outstanding shares of capital stock of the Bank. The Company has authorized the
formation of a new company to
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offer investment and brokerage type services, which will either be a subsidiary
of the Company or the Bank. The subsidiary is expected to open in approximately
May or June 1999.
The Company initially issued 29,998 shares of Common Stock at $10.00
per share in a private offering in order to pay its pre-opening costs and
Offering expenses. On August 21, 1998, the Company commenced an initial public
offering (the "Offering") of its common stock, $0.10 par value per share (the
"Common Stock"), pursuant to the Company's Registration Statement on Form SB-2.
Pursuant to the Registration Statement, the Company sought to issue and sell a
minimum of 500,000 and a maximum of 600,000 shares of the Company's Common Stock
at an offering price of $10.00 per share, primarily for the purpose of raising
the funds necessary to capitalize the Bank.
The Offering was terminated by the Company on October 15, 1998, and the
Company sold a total of 537,438 shares of Common Stock in the Offering.
Effective as of October 23, 1998, the Company purchased with all of the proceeds
received in the Offering all of the capital stock of the Bank, and the Bank
became a wholly owned subsidiary of the Company.
The Company has no significant assets other than its interests in the
Bank. Accordingly, the Company's earnings are primarily dependent upon dividends
received by the Company from the Bank, which dividends are dependent on the
Bank's profitability and the Bank's compliance with certain regulatory
requirements. See " - Regulation - Regulation of the Bank - Dividend and Other
Capital Distribution Limitations."
At the present time, the Company does not have and does not intend to
have any employees other than its officers. The Company will utilize the support
staff of the Bank from time to time.
Business of the Bank
General. On April 7, 1998, the organizers of the Company and the Bank
(the "Organizers") filed an application with the OTS to organize the Bank as a
federal stock savings bank. On September 14, 1998, the OTS conditionally
approved the application, and the Bank obtained all necessary regulatory
approvals to commence banking operations. Effective as of October 23, 1998, the
Bank sold its capital stock to the Company and commenced banking operations on
October 26, 1998. The Bank's deposit accounts are insured by the Federal Deposit
Insurance Corporation (the "FDIC") and the Bank is a member of the Federal Home
Loan Bank System.
Effective as of October 23, 1998, the Company also consummated the
transactions contemplated by the Branch Purchase and Deposit Assumption
Agreement (the "Agreement") dated March 24, 1998, as amended, between the
Company, the Bank and First Commonwealth Bank ("First Commonwealth"). The
Agreement provided for the purchase by Company and the Bank, two branch offices,
certain assets and the assumption of certain deposit liabilities primarily
related to First Commonwealth's branch offices located at 116 East College
Avenue and 1276 North Atherton Street, State College, Pennsylvania.
The Bank is a community-oriented financial institution. Its business is
to attract retail deposits and to invest those deposits, together with funds
generated from operations and borrowings, primarily in one-to-four family
mortgage loans and small business real estate loans. To a lesser extent, the
Bank invests in home equity loans, construction loans (primarily for one- to
four-family home construction for the borrower), commercial business loans and
consumer loans. The Bank's deposit base is
2
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comprised of traditional deposit products including checking accounts, statement
savings accounts, money market accounts, certificates of deposit and individual
retirement accounts.
Market Strategy
The Bank's objective is to create a customer-driven financial
institution focused on providing value to customers by delivering products and
services matched to the customers' needs. It is believed that customers will be
drawn to a locally owned and managed institution that demonstrates an active
interest in its customers and their business and personal financial needs.
The banking industry in the Bank's market area has experienced
substantial consolidation in recent years. Many of the area's locally owned or
managed financial institutions have either been acquired by large regional bank
holding companies or have been consolidated into branches. This consolidation
has been accompanied by increasing fees for bank services, the dissolution of
local boards of directors, management and personnel changes and, in the
perception of management, a decline in the level of customer service. With
recent changes in interstate banking regulation, this type of consolidation is
expected to continue.
Competition
The Bank's market area of Centre County (which includes the borough of
State College and the surrounding townships of State College, Ferguson,
Halfmoon, Harris and Patton) is highly competitive markets for financial
services and the Bank faces intense competition both in making loans and in
attracting deposits. The Bank faces direct competition from a significant number
of financial institutions operating in the Bank's market area, many with a
state-wide or regional presence and in some cases a national presence. Many of
these financial institutions have been in business for many years, have
established customer bases, are significantly larger and have greater financial
resources than the Bank will have and are able to offer certain services that
the Bank is not able to offer. In particular, Centre County, is served almost
entirely by large, regional financial institutions, almost all of which are
headquartered out of the area. These financial institutions include Mellon Bank,
NA (Greensburg, PA), Sovereign Bank (formerly Core States) (Reading,
Pennsylvania), Northwest Savings Bank (Warren, PA), PNC Bank (Pittsburgh), First
Commonwealth Bank (Indiana, PA), Omega Bank (State College), Mid-State Bank
(Harrisburg, PA) and Reliance Bank (Altoona, PA). The area also includes Corning
Employees Credit Union, Penn State Federal Credit Union, SPE Federal Credit
Union and State College Federal Credit Union. Omega Bank, a regional bank with
nine branches in the Bank's market area, is the only banking institution
headquartered in State College.
All of these institutions have been in existence for a longer period of
time than the Bank, are better established than the Bank and have financial
resources substantially greater than those of the Bank. The Bank will have an
existing deposit base when it commences operations, but will be competing for
deposits with these larger established institutions as well as with investment
bankers, money market mutual funds and other non-traditional financial
intermediaries. The Bank will have to attract its loan customer base from
existing financial institutions and from growth in the community. In addition,
the Bank faces competition for deposits and loans from non-bank institutions
such as brokerage firms, credit unions, insurance companies, money market mutual
funds and private lenders.
3
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Plan of Operations
General. The Bank commenced operations as of October 26, 1998, and its
activities have primarily consisted of drawing deposits, making loans and
servicing the deposits and loans acquired from First Commonwealth. At December
31, 1998, the Company had total assets of approximately $24.8 million, total
loans of approximately $4.5 million and total deposits of approximately $14.0
million. The Company experienced a loss of approximately $500,000 for the year
ended December 31, 1998, primarily as a result of operating costs exceeding
revenues.
Capital Resources
Management believes that the $5,374,000 of offering proceeds will
satisfy the current cash requirements of the Company and the Bank, assuming
modest growth and no new branches are opened during this period. However, there
can be no assurance that this will be the case. This estimate is based on the
level of expenses commensurate with the estimated number of employees and
estimated size of the operations of the Bank during this period and the amount
of capital normally required for a bank with total assets in the range in which
management expects the Bank's assets to be during this period. The Company's and
the Bank's future capital requirements, however, will depend on many factors,
including the Bank's ability to successfully originate loans and attract
deposits and the Bank's ability to implement its branch expansion strategy. To
the extent that the Company and the Bank's current capital is insufficient to
fund the Company and the Bank's future operating requirements or to implement
the branch expansion strategy, it may be necessary to raise additional funds,
through public or private financings.
Net Interest Income/Margins
The operations of the Bank are substantially dependent on its net
interest income, which is the difference between the interest expense incurred
in connection with the Bank's interest-bearing liabilities, such as interest on
deposit accounts, and the interest income received from its interest-earning
assets, such as loans and investment securities. Volatility in interest rates
can result in the flow of funds away from banks of the type similar to the Bank
and into direct investments, such as corporate securities and other investment
vehicles which, because of among other things the absence of federal deposit
insurance, generally pay higher rates of return. Such volatility could cause the
Bank to pay increased interest rates to obtain deposits and, if the Bank is not
able to increase the interest rates on its loans and the rate of return on its
investment portfolio, the Bank's net interest income will suffer.
The level of net interest income is determined primarily by the average
balances ("volume") and the rate spreads between the Bank's interest-earning
assets and the Bank's funding sources. The Bank's ability to maximize its net
interest income depends on increases or decreases in the volume of its
interest-earning assets and interest-bearing liabilities, increases or decreases
in the average rates earned and paid on such assets and liabilities, the ability
to manage the earning-asset portfolio, and the availability of particular
sources of funds, such as non-interest earning deposits.
The following table indicates the average volume of interest-earning
assets and interest-bearing liabilities and average yields and rates for the
Company and the Bank for the period from November 1, 1998 to December 31, 1998,
the operating period of the Bank.
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Average balances are derived from daily averages calculated for the
period of November 1, 1998 to December 31, 1998, which represents the period
that banking operations were in effect.
<TABLE>
<CAPTION>
For the Period Ended December 31,
---------------------------------
1998
----
(4)
Average (1) Average
Balance Interest Yield/Cost
------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable...................................... $1,676 $25 9.03%
Investments securities................................ 6,734 61 5.42%
Interest-bearing deposits with other banks............ 10,407 100 4.98%
------ --- ----
Total interest-earning assets.......................... 18,818 186 5.50%
---
Noninterest-earning assets.............................. 874
Allowance for loan losses............................... (97)
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Total assets............................................ $19,595
======
Interest-bearing liabilities:
Interest-bearing demand deposits...................... $ 2,064 6 1.64%
Money market deposits................................. 3,395 28 4.96%
Savings deposits...................................... 1,521 9 3.47%
Certificates of deposit............................... 4,763 46 5.77%
Advances from FHLB.................................... 832 6 4.39%
------- ----- ----
Total interest-bearing liabilities...................... 12,575 95 4.50%
----
Noninterest-bearing liabilities
Demand deposits....................................... 779
Other liabilities..................................... 814
Stockholders' equity.................................... 5,427
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Total liabilities and stockholders' liability........... $19,595
======
Net interest income..................................... $ 91
===
Interest rate spread (2)................................ 1.00%
Net yield on interest-earning assets(3)................. 2.49%
Ratio of average interest-earnings assets to
average interest-bearing liabilities................... 149.65%
</TABLE>
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(1) Interest income and expense are for the period that banking operations were
in effect.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(4) Average yields are computed using annualized interest income and expense
for the periods.
Liquidity and Interest Rate Sensitivity
The primary objective of asset/liability management is to ensure the
steady growth of the Company and the Bank's primary earnings component, net
interest income. Net interest income can
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fluctuate with significant interest rate movements. To lessen the impact of
these rate swings, management will endeavor to structure the Company and the
Bank's balance sheet so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitutes interest rate sensitivity.
The measurement of the Company's and the Bank's interest rate
sensitivity, or "gap," is one of the principal techniques used in
asset/liability management. The interest sensitive gap is the dollar difference
between assets and liabilities which are subject to interest-rate pricing within
a given time period, including both floating rate or adjustable rate instruments
and instruments which are approaching maturity.
The following table sets forth the amount of the Company and the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 1998
which are expected to mature or reprice in each of the time periods shown (in
thousands):
<TABLE>
<CAPTION>
Less than Over
1 year 1-5 years 5 Years Total
----------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 2,852 $ 200 $ 1,480 $ 4,532
Investment securities 982 2,508 9,661 13,151
Other interest-earning
assets 5,616 -- -- 5,616
-------- -------- -------- --------
Total interest-earning
assets 9,450 2,708 11,141 23,299
======== ======== ======== ========
Interest-bearing liabilities
NOW accounts $ 2,146 $ -- $ -- $ 2,146
Money market accounts 5,409 -- -- 5,409
Savings accounts 1,270 -- -- 1,270
Certificates of deposit 3,287 1,103 -- 4,390
Other interest-bearing
liabilities -- 5,000 -- 5,000
------- -------- -------- --------
Total interest-bearing
liabilities $ 12,112 $ 6,103 $ -- $ 18,215
======= ======== ======== ========
Excess interest-earning
assets (liabilities) $ (2,662) $ (3,395) $ 11,141
======= ======== ========
Cumulative interest-
earning assets $ 9,450 $ 12,158 $ 23,299
Cumulative interest-
bearing liabilities 12,112 18,215 18,215
------- -------- --------
Cumulative gap $ (2,662) $ (6,057) $ 5,084
======= ======== ========
Cumulative interest rate
sensitivity ratio (1) (0.78) (0.67) 1.28
======== ======== ========
</TABLE>
- ----------------------------
(1) Cumulative interest-earning assets divided by cumulative interest-bearing
liabilities.
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Since all interest rates and yields do not adjust at the same velocity,
the gap is only a general indicator of interest rate sensitivity. The analysis
of the Bank's interest-earning assets and interest-bearing liabilities presents
only a static view of the timing of maturities and repricing opportunities,
without taking into consideration the fact that changes in interest rates do not
affect all assets and liabilities equally. Net interest income may be impacted
by other significant factors in a given interest rate environment, including
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities.
As indicated by the above table, the Bank's interest-earning assets
consist primarily of fixed rate, long-term loans while the Bank's
interest-bearing liabilities consist primarily of variable rate short-term
accounts. Since the interest-earning assets will mature more slowly than the
interest-bearing liabilities, the net portfolio value and net interest income
will tend to decrease during periods of rising interest rates, but will increase
during periods of falling interest rates.
Bank management will seek to improve the interest rate sensitivity of
the Bank's loan portfolio. Bank management meets periodically to monitor and
manage the structure of the Bank's balance sheet, control interest rate
exposure, and evaluate pricing strategies for the Bank. Strategies to better
match maturities of interest-earning assets and interest-bearing liabilities
could include call provisions, adjustable rate mortgages, residential
construction lending and other short term products. The Bank intends to sell
originations of long-term fixed rate mortgages that are not subject to rate
adjustments within 15 years in the secondary market and portfolio rate sensitive
products. All long-term fixed rate mortgages are underwritten in accordance with
GNMA, FNMA or FHLMC requirements. At December 31, 1998, there were no long-term
fixed rate mortgage loans classified as available for sale.
In theory, interest rate risk can be diminished by maintaining a
nominal level of interest rate sensitivity. In practice, this is made difficult
by a number of factors, including cyclical variation in loan demand, different
impacts on interest-sensitive assets and liabilities when interest rates change,
and the availability of funding sources. Bank management will generally attempt
to maintain a balance between rate-sensitive assets and liabilities as the
exposure period is lengthened to minimize the overall interest rate risk to the
Bank.
Year 2000
A great deal of information has been disseminated about the global
computer year 2000. Many computer programs that can only distinguish the final
two digits of the year entered (a common programming practice in earlier years)
are expected to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or are expected to be
unable to compute payment, interest or delinquency. Rapid and accurate data
processing is essential to the Bank's operation. Data processing is also
essential to most other financial institutions and many other companies. A third
party service bureau provides the Bank with all of the material data processing
that could be affected by this problem. The third party service bureau (the
"service bureau") has advised the Bank that it is substantially compliant and it
expects to resolve this potential problem before the year 2000. In this vein,
the core application software vendor, whose products are used by the service
bureau, has recently obtained ITAA*2000 certification, which indicates that the
software has the core capabilities needed to handle the Year 2000 challenge.
However, if the service bureau is unable to resolve all facets of this potential
problem in time, we could likely experience significant data processing delays,
mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on our financial condition and our results of
operation. In order to determine the service bureau is year 2000 compliant,
management must develop a test plan, which it intends to
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implement during the first half of 1999. Management is aware of the significance
of the year 2000 issue and is presently working to define a comprehensive plan
of action for year 2000. Management expects to incur additional operating
expenses during 1999 relating to the designing and performing tests of the
Bank's computer systems. Currently, the Bank estimates such costs will be
approximately $10,000. Additionally, management is also addressing a contingency
plan in the event any portion of the Bank's operations is adversely affected by
year 2000 related processing errors.
Successful and timely completion of the year 2000 plan is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress of testing plans and all
vendors, suppliers and customer readiness.
Lending Activities
General
The Bank anticipates that its lending activities will be primarily
comprised of the origination of mortgage loans for the purpose of financing and
refinancing one-to-four family residential properties and small business real
estate loans. To a lesser extent, the Bank anticipates that it will originate
home equity loans, construction loans (primarily for one-to-four family home
construction for the borrower), commercial business loans and consumer loans.
The types of loans the Bank will originate generally will be subject to federal
and state law and regulation.
The Bank's ability to originate loans is dependent upon the relative
customer demand, which is affected by the current and expected future level of
interest rates. Interest rates are affected by the demand for loans and the
supply of money available for lending purposes and the rates offered by
competitors. Among other things, these factors are, in turn, affected by
economic conditions, monetary policies of the federal government, including the
Federal Reserve, and legislative tax policies.
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Bank's loan portfolio by type of loan and in
percentage of the respective portfolio as of December 31, 1998.
Amount Percent
------ -------
Type of Loans: (In thousands)
Real Estate Loans:
One- to-four family................... $1,653 36.47%
Commercial real estate................ 858 18.93
Home equity........................... 998 22.02
Commercial.............................. 163 3.60
Consumer Loans.......................... 860 18.98
----- ------
Total.............................. $4,532 100.00%
===== ======
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Loan Maturity Tables
The following table sets forth the contractual maturity of the Bank's
loan portfolio at December 31, 1998. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled approximately $171,000 for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
One- to-four family...................... $ -- $ -- $1,653 $1,653
Commercial real estate................... -- 115 743 858
Home equity.............................. 397 116 485 998
Commercial .............................. 21 7 135 163
Consumer................................. 715 77 68 860
----- ---- ------ ------
Total amount due $1,133 $315 $3,084 $4,532
===== === ===== =====
</TABLE>
The following table sets forth dollar amount of all loans due after
December 31, 1999, which have predetermined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
<S> <C> <C> <C>
One- to-four family........................ $ 792 $ 861 $1,653
Commercial real estate..................... -- 858 858
Home equity................................ 601 -- 601
Commercial................................. 142 -- 142
Consumer .................................. 145 -- 145
----- ----- -----
Total............................. $1,680 $ 1,719 $3,399
===== ===== =====
</TABLE>
One- to Four-Family Lending. The Bank's one- to four-family residential
mortgage loans are secured by property located in the Bank's market area. The
Bank generally originates one- to four-family residential mortgage loans in
amounts up to 90% of the lesser of the appraised value or selling price of the
mortgaged property without requiring mortgage insurance. The Bank generally
originates and retains fixed rate and adjustable rate loans for retention in its
portfolio. A mortgage loan originated by the Bank, for owner occupied property,
whether fixed rate or adjustable rate, can have a term of up to 30 years.
Non-owner occupied property, whether fixed rate or adjustable rate, can have a
term of up to 25 years. Most mortgage products are held in portfolio and are
serviced by the Bank. The Bank offers adjustable rate loans with fixed rate
periods of up to 7 years, with principal and interest calculated using a maximum
30 year (owner occupied) or 25 year (non-owner occupied) amortization period.
The Bank offers these loans with a fixed rate for the first seven years (three
years for non-owner occupied) with repricing following every year after that
initial fixed period. Adjustable rate loans limit the periodic interest rate
adjustment and the minimum and maximum rates that may be charged over the term
of the loan based on the type of loan.
9
<PAGE>
All of the Bank's residential mortgages include "due on sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately
payable if the borrower sells or otherwise transfers an interest in the property
to a third party.
Property appraisals on real estate securing the Bank's single-family
residential loans are made by state certified and licensed independent
appraisers approved by the Board of Directors. Appraisals are performed in
accordance with applicable regulations and policies. At its discretion, the Bank
obtains either title insurance policies or attorney's certificates of title, on
all first mortgage real estate loans originated. In some instances, the Bank
charges a fee equal to a percentage of the loan amount (commonly referred to as
points).
Construction Loans. The Bank originates loans to finance the
construction of one- to four-family dwellings. Generally, the Bank only makes
interim construction loans to individuals if it also makes the permanent
mortgage loan on the property. Interim construction loans to builders generally
have terms of up to one year and interest rates which are slightly higher than
normal residential mortgage loans. These loans generally are adjustable rate
loans.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Real Estate Loans. The Bank's commercial real estate loans
are loans secured by commercial real estate (e.g., shopping centers, medical
buildings, retail offices) in the Bank's market area. Permanent loans on
commercial properties are generally originated in amounts up to 80% of the
appraised value of the property. The Bank's permanent commercial real estate
loans are secured by improved property such as office buildings, retail stores,
warehouse, church buildings and other non-residential buildings, most of which
are located in the Bank's primary market area. Commercial real estate loans are
generally made at rates which adjust above the treasury interest rate or are
balloon loans with fixed interest rates which generally mature in three to five
years with principal amortization for a period of up to 25 years.
Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than one- to four-family residential mortgage
loans. Of primary concern, in commercial and multi-family real estate lending,
is the borrower's creditworthiness and the feasibility and cash flow potential
of the project. Loans secured by income properties are generally larger and
involve greater risks than residential mortgage loans because payments on loans
secured by income properties are often dependent on successful operation or
management of the properties. As a result, repayment of such loans may be
subject to a greater extent than residential real estate loans to adverse
conditions in the real estate market or the economy.
Commercial Business Loans. The Bank's commercial business loans are
underwritten on the basis of the borrower's ability to service such debt from
income. The Bank's commercial business
10
<PAGE>
loans are generally made to small and mid-sized companies located within the
Bank's primary lending area. In most cases, the Bank requires additional
collateral of equipment, accounts receivable, inventory, chattel or other assets
before making a commercial business loan.
Consumer. Regulations permit federally chartered thrift institutions to
make secured and unsecured consumer loans up to 35% of the institution's assets.
The Bank makes various types of secured and unsecured consumer loans including
home equity lines of credit and automobile loans (new and used). Consumer loans
generally have terms of three years to ten years, some of which are at fixed
rates and some of which have rates that adjust periodically.
Consumer loans are advantageous to the Bank because of their interest
rate sensitivity, but they also involve more credit risk than residential
mortgage loans because of the higher potential of defaults and the difficulties
involved in disposing of the collateral, if any.
Loan Approval Authority and Underwriting. The Bank establishes various
lending limits for its officers and maintains a loan committee. The loan
committee is comprised of the Chairman of the Board, the President, the
Executive Loan Officer and two outside members of the Board of Directors. The
President has authority to approve applications for mortgage loans up to
$300,000, secured loans up to $200,000 and unsecured loans up to $125,000. The
executive lending officer has authority to approve loans up to $250,000,
depending upon the collateral secured. Additionally, the President, together
with the executive loan officer has authority to approve applications for
mortgage loans up to $400,000, secured loans up to $250,000 and unsecured loans
up to $150,000. Personal banking officers generally have authority to approve
loan applications between $5,000 and $75,000, depending upon the collateral
secured. The loan committee considers all applications in excess of the above
lending limits and the entire board of directors ratifies all such loans.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers.
Title insurance is generally required on all real estate mortgage
loans. Borrowers also must obtain fire and casualty insurance. Flood insurance
is also required on loans secured by property that is located in a flood zone.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 45 days of the date of issuance. At December 31, 1998,
commitments to cover originations of mortgage loans totalled $2,938,000.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 15 days past due, a
notice of nonpayment is sent to the borrower. If such payment is not received by
month end, an additional notice of nonpayment is sent to the borrower. After 60
days, if payment is still delinquent, a notice of right to cure default is sent
to the borrower giving 30 additional days to bring the loan current before
foreclosure is commenced. If the loan continues in a delinquent status for 90
days past due and no repayment plan is in effect, foreclosure proceedings will
be initiated.
11
<PAGE>
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 90 days delinquent or when, in our opinion, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan. At December 31, 1998, the Bank had no
nonperforming loans or problem assets.
Classified Assets. OTS regulations provide for a classification system
for problem assets of savings banks which covers all problem assets. Under this
classification system, problem assets of savings banks such as the Bank are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings bank will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weaknesses that do not currently warrant
classification in one of the aforementioned categories.
When a savings bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings bank classifies problem assets as
loss, it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge off such amount.
A savings bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining a
savings bank's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital. At December 31, 1998, the Bank
had no classified assets.
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Bank's loan portfolio. The evaluation, including a review of all loans on
which full collectibility of interest and principal may not be reasonably
assured, considers: (i) known and inherent risks in the Bank's portfolio, (ii)
adverse situations that may affect the borrower's ability to repay, (iii) the
estimated value of any underlying collateral, and (iv) current economic
conditions.
The Bank monitors its allowance for loan losses and makes additions to
the allowance as economic conditions dictate. Although the Bank maintains its
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in its loan portfolio, future losses could exceed estimated amounts
and additional provisions for loan losses could be required. In addition, the
Bank's determination of the amount of the allowance for loan losses is subject
to review by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the
12
<PAGE>
establishment of an additional allowance. Any increase in the loan loss
allowance required by the OTS would have a negative impact on the Bank's
earnings.
At December 31, 1998, the following table illustrates the allocation of
the allowance for loan losses for each category of loan. The allocation of the
allowance to each category is not necessarily indicative of future loss in any
particular category and does not restrict the Bank's use of the allowance to
absorb losses in other loan categories.
Percent of
Loans in
Each
Category to
Amount Total Loans
------ -----------
(Dollars in thousands)
Type of Loans:
Real Estate Loans:
One- to-four family.................... $19 36.47%
Commercial real estate................. 27 18.93
Home equity............................ 31 22.02
Commercial.................................. 18 3.60
Consumer.................................... 13 18.98
-- ------
Total............................ $99 100.00%
== ======
13
<PAGE>
At December 31, 1998, following table sets forth information with
respect to the Bank's allowance for loan losses (dollars in thousands):
Total loans outstanding.............................. $4,532
=====
Average loans outstanding............................ $1,676
=====
Allowance balance (at October 26, 1998).............. $ --
Provision:
Real estate loans.................................... 80
Commercial........................................... --
Consumer............................................. 20
Charge-offs:
Real estate loans.................................... --
Commercial........................................... --
Consumer (overdrafts)................................ (1)
Recoveries:
Real estate loans.................................... --
Commercial........................................... --
Consumer............................................. --
-------
Allowance balances (at December 31, 1998)............ $ 99
=======
Allowance for loan losses as a percent of
total loans outstanding.............................. 2.18%
Net loans charged off as percent of average
loans outstanding.................................... .06%
14
<PAGE>
Investment Activities
Investment Securities. The Bank is required under federal regulations
to maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. See "Regulation --
Regulation of the Bank -- Federal Home Loan Bank System." The level of liquid
assets varies depending upon several factors, including: (i) the yields on
investment alternatives, (ii) the Bank's judgment as to the attractiveness of
the yields then available in relation to other opportunities, (iii) expectation
of future yield levels, and (iv) the Bank's projections as to the short-term
demand for funds to be used in loan origination and other activities. The Bank
classifies its investment securities as "available for sale" or "held to
maturity" in accordance with SFAS No. 115. At December 31, 1998, the Bank's
investment portfolio policy allowed investments in instruments such as: (i) U.S.
Treasury obligations, (ii) U.S. federal agency or federally sponsored agency
obligations, (iii) local municipal obligations, (iv) mortgage-backed securities,
(v) banker's acceptances, (vi) certificates of deposit, (vii) federal funds,
including FHLB overnight and term deposits, and (viii) investment grade
corporate bonds, commercial paper and mortgage derivative products. The board of
directors may authorize additional investments.
To supplement lending activities, the Bank has invested in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings and, through repayments, as a source of liquidity.
Mortgage-backed securities represent a participation interest in a pool of
single-family or other type of mortgages. Principal and interest payments are
passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Bank. The quasi-governmental
agencies guarantee the payment of principal and interest to investors and
include the Federal Home Loan Mortgage Corporation ("FHLMC"), Government
National Mortgage Association ("GNMA"), and Federal National Mortgage
Association ("FNMA").
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC and GNMA make up a majority of the
pass-through certificates market.
Securities Portfolio. At December 31, 1998, the following table sets
forth the Bank's securities portfolio classified as available for sale (in
thousands):
U.S. Government agency securities.......... $ 5,719
Corporate securities....................... 3,521
Mortgage-backed securities................. 3,604
Equity securities.......................... 307
-------
Total investment securities................ $13,151
======
15
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, estimated fair values, and weighted average yields
for the Bank's investments securities portfolio at December 31, 1998 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------------------------------------------------------------------------------------
Within More than More than
One Year One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- --------- --------- -------- ------- ------------ ------- ----------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
agency securities..... $ -- --% $2,002 5.81% $3,717 6.32% $ -- --% $ 5,719 6.14% $ 5,719
Corporate securities.. -- -- 506 6.27 -- -- 3,015 5.47 3,521 5.58 3,521
Mortgage-backed
securities............ -- -- -- -- 514 7.50 3,090 6.85 3,604 6.94 3,604
Equity securities..... 307 5.62 -- -- -- -- -- -- 307 5.62 307
----- ------- ------ ------ ------- -------
Total investment... $ 307 5.62% $2,508 5.90% $4,231 6.46% $6,105 6.17% $13,151 6.20% $13,151
==== ==== ===== ==== ====== ==== ===== ======= =======
</TABLE>
16
<PAGE>
Sources of Funds
Deposits are the Bank's major external source of funds for lending and
other investment purposes. Funds are also derived from the receipt of payments
on loans and prepayment of loans and maturities of investment securities and
mortgage-backed securities and, to a much lesser extent, borrowings and
operations. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a selection
of deposit instruments including checking and savings accounts, money market
accounts, and term certificate accounts. IRA accounts and NOW accounts are also
offered. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit, and the interest rate.
The interest rates paid by the Bank on deposits are set at the
direction of its senior management. Interest rates are determined based on the
Bank's liquidity requirements, interest rates paid by its competitors, and its
growth goals and applicable regulatory restrictions and requirements. At
December 31, 1998, the Bank had no brokered deposits and its deposits were
represented by the following types of savings programs.
Deposit Rate. The following table sets forth the distribution of the
Bank's average balance of deposit accounts at December 31, 1998 and the weighted
average nominal interest rates on each category of deposit presented.
Weighted
Percent of Average
Average Total Nominal
Balance Deposits Rate
------- -------- ----
(Dollars in thousands)
Checking accounts............... $ 2,064 17.58% 1.64%
Money market deposit accounts... 3,395 28.91 4.96
Passbook and regular savings.... 1,521 12.95 3.47
Certificates of deposit......... 4,763 40.56 5.77
------ ------ ----
Total deposits......... $11,743 100.00% 4.47%
====== ====== ====
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months $407
Three through six months 166
Six through twelve months 101
Over twelve months 100
---
$774
====
17
<PAGE>
Borrowings. The Bank may obtain advances (borrowings) from the FHLB of
Pittsburgh to supplement its supply of lendable funds. Advances from the FHLB of
Pittsburgh are typically secured by a pledge of the Bank's stock in the FHLB of
Pittsburgh, a portion of the Bank's first mortgage loans and other assets. Each
FHLB credit program has its own interest rate, which may be fixed or adjustable,
and range of maturities. If the need arises, the Bank may also access the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements.
Employees
At December 31, 1998 the Bank had 13 full-time and 3 part-time
employees. The employees of the Bank perform clerical work for the Company from
time to time; otherwise, the Company has no employees other than its officers.
None of the Bank's employees are represented by a collective bargaining group.
The Bank believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
18
<PAGE>
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank pays an insurance premium to the
FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund
("BIF"), which primarily insures commercial bank deposits. The deposit insurance
assessment for most SAIF members is .064% of deposits on an annual basis through
the end of 1999. During this same period, BIF members will be assessed
approximately .013% of deposits. After 1999, assessments for BIF and SAIF
members should be the same. It is expected that these continuing assessments for
both SAIF and BIF members will be used to repay outstanding Financing
Corporation bond obligations.
Loans to One Borrower. The maximum amount of loans which the Bank may
make to any one borrower may not exceed the greater of $500,000 or 15% of the
Bank's unimpaired capital and unimpaired surplus. The Bank may lend an
additional 10% of its unimpaired capital and unimpaired surplus if the loan is
fully secured by readily marketable collateral.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. In addition, the OTS prompt
corrective action regulation provides that a savings institution that has a
leverage capital ratio of less than 4% (3% for institutions receiving the
highest examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. The Bank significantly exceeds all minimum
regulatory capital requirements. Additionally, in accordance with the FDIC
approval order for Federal Deposit Insurance, the Bank must maintain a ratio of
Tier 1 capital to average assets of at least 8% for a period of three years,
from October 26, 1998. At December 31, 1998, the Bank's Tier 1 ratio was 31.6%.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and
19
<PAGE>
the OTS has the authority under its supervisory powers to prohibit the payment
of dividends to the
Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. The OTS
has recently revised this rule to allow certain institutions to make capital
distributions without filing an application or notice with the OTS; however, the
revised rule will not take effect until April 1, 1999. As of December 31, 1998,
the Bank was a Tier 1 institution. In the event the Bank's capital fell below
its fully phased-in requirement or the OTS notified it that it was in need of
more than normal supervision, the Bank's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Pittsburgh. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus goodwill and other intangible assets, property used by the institution in
conducting its business and liquid assets in an amount not exceeding 20% of
total assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings associations may include shares of stock
of the FHLBs, FNMA and FHLMC as qualifying QTIs. An association must be in
compliance with the QTL test on a monthly basis in nine out of every twelve
months.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations or 5%
of its outstanding borrowings to the FHLB of Pittsburgh, at the beginning of
each year.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances
20
<PAGE>
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy the liquidity requirements that are imposed by the OTS.
At December 31, 1998, the Bank was in compliance with these Federal Reserve
Board requirements through its accounts at the FHLB.
Item 2. Description of Property
- -------------------------------
(a) Property.
The Bank operates from its main office and one branch office.
Leased or Year Leased
Location Owned or Acquired
- -------- ----- -----------
(main office)
116 East College Avenue Leased 1998
State College, Pennsylvania
(branch office)
1276 North Atherton Street Leased 1998
State College, Pennsylvania
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business -
Lending Activities and - Regulation of the Bank."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
21
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
Common Stock Price Range and Dividends Paid
The Company's Common Stock is traded on the over-the counter electronic
bulletin board under the symbol "NTNY"). The Company's stock began trading on
October 26, 1998. The high and low sales prices for October 26, 1998 through
December 31, 1998 was $12.00 and $10.25, respectively. There were no dividends
paid in 1998. At February 28, 1998, the Company has approximately 424
shareholders of record. This does not reflect the number of persons or entities
who held stock in nominee or "street" name through various brokerage firms. See
"Business - Business of the Company" for a description of the Company's ability
to pay dividends.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
Refer to "Plan of Operations."
22
<PAGE>
Item 7. Financial Statements
- ------------------------------
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Nittany Financial Corp.
We have audited the accompanying consolidated balance sheet of Nittany Financial
Corp. and subsidiary, as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year ended December 31, 1998 and for the period from October 9,
1997, the date of inception, to December 31, 1997. These 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 consolidated 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 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 Nittany Financial
Corp. and subsidiary as of December 31, 1998 and 1997, the results of their
operations and their cash flows for the year ended December 31, 1998 and for the
period from October 9, 1997, the date of inception, to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/S.R. Snodgrass, A.C.
Wexford, PA
April 12, 1999
23
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 307,443 $ 660
Interest-bearing deposits with other banks 5,621,800 28,789
Investment securities available for sale 13,150,768 -
Loans receivable (net of allowance for loan losses
of $98,988) 4,424,132 -
Premises and equipment 126,160 -
Intangible assets 941,886 -
Accrued interest and other assets 218,394 70,000
------------------ -----------------
TOTAL ASSETS $ 24,790,583 $ 99,449
================== =================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 777,400 $ -
Interest-bearing demand 2,146,171 -
Money market 5,409,434 -
Savings 1,269,834 -
Time 4,389,545 -
------------------ -----------------
Total deposits 13,992,384 -
FHLB advance 5,000,000 -
Commitment to purchase investment security 500,000 -
Accrued interest payable and other liabilities 144,546 125,226
------------------ -----------------
TOTAL LIABILITIES 19,636,930 125,226
------------------ -----------------
STOCKHOLDERS' EQUITY
Serial preferred stock, no par value; 5,000,000 shares
authorized; none issued - -
Common stock, $.10 par value; 10,000,000 shares
authorized; 577,436 issued and outstanding 57,744 -
Additional paid-in capital 5,652,145 -
Retained deficit (525,650) (25,777)
Net unrealized loss on securities (30,586) -
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 5,153,653 (25,777)
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,790,583 $ 99,449
================== =================
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Period From
October 9, 1997,
the Date of
Year Ended Inception, to
December 31, December 31,
1998 1997
------------------ -------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 25,301 $ -
Interest-bearing deposits with other banks 100,474 295
Investment securities 61,029 -
------------------ -------------------
Total interest and dividend income 186,804 295
------------------ -------------------
INTEREST EXPENSE
Deposits 88,535 -
FHLB advance 6,105 -
------------------ -------------------
Total interest expense 94,640 -
------------------ -------------------
NET INTEREST INCOME 92,164 295
Provision for loan losses 100,000 -
------------------ -------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES (7,836) 295
------------------ -------------------
NONINTEREST INCOME
Service fees on deposit accounts 13,120 -
------------------ -------------------
Total noninterest income 13,120 -
------------------ -------------------
NONINTEREST EXPENSE
Compensation and employee benefits 194,129 19,749
Occupancy and equipment 46,961 -
Data processing 17,178 -
Other 246,889 6,323
------------------ -------------------
Total noninterest expense 505,157 26,072
------------------ -------------------
Loss before income taxes (499,873) (25,777)
Income taxes - -
------------------ -------------------
NET LOSS $ (499,873) $ (25,777)
================== ===================
LOSS PER SHARE $ (3.62) $ -
WEIGHTED-AVERAGE SHARES OUTSTANDING 138,049 -
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Additional Unrealized Total
Common Paid-in Retained Loss on Stockholders' Comprehensive
Stock Capital Deficit Securities Equity Loss
------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 9, 1997, date of inception $ - $ - $ - $ - $ -
Net loss (25,777) (25,777) $ (25,777)
------- ----------- ----------- --------- ------------ ==========
Balance, December 31, 1997 - - (25,777) - (25,777)
Net loss (499,873) (499,873) (499,873)
Other comprehensive loss:
Unrealized loss on available for sale securities (30,586) (30,586) (30,586)
----------
Comprehensive loss $ (530,459)
==========
Sale of 29,998 shares of common stock to
company organizers 3,000 296,980 299,980
Sale of 537,438 shares of common stock, issued
October 26, 1998, net of offering costs 53,744 5,256,165 5,309,909
Issuance of 10,000 shares of common stock in
settlement of branch office acquisitions 1,000 99,000 100,000
------- ----------- ----------- --------- ------------
Balance, December 31, 1998 $ 57,744 $ 5,652,145 $ (525,650) $ (30,586) $ 5,153,653
======= =========== =========== ========= ============
</TABLE>
See accompanying notes to the consolidated financial statements.
26
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
October 9, 1997,
the Date of
Year Ended Inception, to
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (499,873) $ (25,777)
Adjustments to reconcile net loss to
net cash used for operating activities:
Provision for loan losses 100,000 -
Depreciation, amortization, and accretion, net 15,567 -
Increase in accrued interest receivable (165,446) -
Increase in accrued interest payable 94,345 -
Other, net (57,973) 5,226
----------------- -----------------
Net cash used for operating activities (513,380) (20,551)
----------------- -----------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (12,740,623) -
Repayments 55,616 -
Net increase in loans receivable (3,829,403) -
Branch office acquisitions:
Purchase of loans (694,729) -
Purchase of premises and equipment (28,862) -
Net deposit proceeds 9,326,707 -
Purchase of premises and equipment (101,304) -
----------------- -----------------
Net cash used for investing activities (8,012,598) -
----------------- -----------------
FINANCING ACTIVITIES
Net increase in deposits 3,815,883 -
Proceeds from FHLB advance 5,000,000 -
Advances from organizers - 50,000
Net proceeds from sale of common stock 5,609,889 -
----------------- -----------------
Net cash provided by financing activities 14,425,772 50,000
----------------- -----------------
Increase in cash and cash equivalents 5,899,794 29,449
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 29,449 -
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,929,243 $ 29,449
================= =================
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and borrowings $ 61,827 $ -
</TABLE>
See accompanying notes to the consolidated financial statements.
27
<PAGE>
NITTANY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
- ----------------------------------------------
Nittany Financial Corp. (the "Company") began the formation process on October
9, 1997, and was incorporated under the laws of the State of Pennsylvania on
December 8, 1997, for the purpose of becoming a unitary savings and loan holding
company that would own all of the outstanding shares of common stock of Nittany
Bank (the "Bank") a federal stock savings bank. The Company's business is
conducted by its wholly-owned subsidiary, the Bank, which is located in State
College, Pennsylvania. The Bank's principal sources of revenue emanate from
interest earnings on its investment securities and loan portfolios. The Company
and the Bank are subject to regulation and supervision by the Office of Thrift
Supervision.
Prior to October 26, 1998, the date the Company commenced its banking
operations, the Company's operations were limited to in-formation procedures;
raising capital, recruiting officers and staff, obtaining a banking facility,
and working towards obtainment of regulatory approval. Since the Company's
planned principal operations had not yet commenced, no significant revenue was
derived therefrom.
The consolidated financial statements of the Company include the accounts of its
wholly-owned subsidiary, the Bank. All intercompany transactions have been
eliminated in consolidation. The investment in subsidiary on the parent
company's financial statements is carried at the parent company's equity in the
underlying net assets.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment Securities
- ---------------------
Investment securities, including mortgage-backed securities, are classified at
the time of purchase, based upon management's intentions and abilities, as
securities held to maturity or securities available for sale. Debt securities
acquired with the intent and ability to hold to maturity are classified as held
to maturity and are stated at cost and adjusted for amortization of premium and
accretion of discount, which are computed using a method which approximates a
level yield and recognized as adjustments of interest income. All other debt
securities are classified as available for sale to serve principally as a source
of liquidity. Unrealized holding gains and losses on available for sale
securities are reported as a separate component of stockholders' equity, net of
tax, until realized. Realized securities gains and losses are computed using the
specific identification method. Interest and dividends on investment securities
are recognized as income when earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership in
an institution which is wholly-owned by other financial institutions. This
equity security is accounted for at cost.
28
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
- ----------------
Loans receivable are stated at their unpaid principal amounts, net of the
allowance for loan losses. Interest on loans is recognized as income when earned
on the accrual method. Interest accrued on loans more than 90 days delinquent is
generally offset by a reserve for uncollected interest and is not recognized as
income.
The accrual of interest is generally discontinued when management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest is charged against income.
Interest received on nonaccrual loans is either applied to principal or reported
as interest income, according to management's judgment as to the collectibility
of principal.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as adjustment of the related loan's yield.
The Company is amortizing these amounts over the contractual life of the related
loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses which is
charged to operations. The provision is based on management's evaluation of the
adequacy of the allowance for loan losses which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan losses,
including the amounts and timing of future cash flows expected on impaired
loans, are particularly susceptible to significant changes in the near term.
A loan is considered impaired when it is probable the borrower will not repay
the loan according to the original contractual terms of the loan agreement.
Management has determined that first mortgage loans on one-to-four family
properties and all consumer loans represent large groups of smaller-balance
homogeneous loans that are to be collectively evaluated. Management considers an
insignificant delay, which is defined as less than 90 days by the Company, will
not cause a loan to be classified as impaired. A loan is not impaired during a
period of delay in payment if the Company expects to collect all amounts due
including interest accrued at the contractual interest rate for the period of
delay. All commercial and commercial real estate loans identified as impaired
are evaluated independently by management. The Company estimates credit losses
on impaired loans based on the present value of expected cash flows or the fair
value of the underlying collateral if the loan repayment is expected to come
from the sale or operation of such collateral. Impaired loans, or portions
thereof, are charged off when it is determined that a realized loss has
occurred. Until such time, an allowance for loan losses is maintained for
estimated losses. Cash receipts on impaired loans are applied first to accrued
interest receivable unless otherwise required by the loan terms, except when an
impaired loan is also a nonaccrual loan, in which case the portion of the
receipts related to interest is recognized as income.
Premises and Equipment
- ----------------------
Premises, leasehold improvements, and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the useful lives of the related
assets. Expenditures for maintenance and repairs are charged to operations as
incurred. Costs of major additions and improvements are capitalized.
29
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes
- --------------------
Income tax expense consists of current and deferred taxes. Current income tax
provisions approximate taxes to be paid or refunded for the applicable year.
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax basis of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
Recognition of deferred tax assets is based on management's belief that it is
more likely than not that the tax benefit associated with these temporary
differences such as the tax operating loss carryforward, will be realized. A
valuation allowance is recorded for those deferred tax assets for which it is
more likely than not that realization will not occur in the near term.
Comprehensive Income (Loss)
- ---------------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." In adopting Statement No.
130, the Company is required to present comprehensive income and its components
in a full set of general purpose financial statements for all periods presented.
The Company has elected to report the effects of Statement No. 130 as part of
the Statement of Changes in Stockholders' Equity.
Loss Per Share
- --------------
The Company currently maintains a simple capital structure; therefore, there are
no dilutive effects on the loss per share. As such, loss per share computations
are based upon the weighted number of shares outstanding for the period since
the initial issuance of common stock began on February 18, 1998, to December 31,
1998.
Intangible Assets
- -----------------
Intangible assets are comprised exclusively of goodwill resulting from the
branch office acquisitions in 1998. Goodwill is amortized using the
straight-line method over a 20-year period. Annual assessments of the carrying
values and remaining amortization periods of the goodwill are made to determine
possible carrying value impairment and appropriate adjustments as deemed
necessary.
Organizational and Start-up Activity Costs
- ------------------------------------------
Effective for fiscal years beginning after December 15, 1998, AICPA Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities" ("SOP")
requires entities to expense costs of such start-up and organizational
activities as incurred. The Company has elected early adoption of this SOP and
implemented it, effective January 1, 1998. Accordingly, only those costs of
organization associated with the initial stock offering ("IPO"), which were net
against the IPO proceeds, were not expensed.
Advances From Organizers
- ------------------------
In 1997, one of the organizers of the Company advanced $50,000 to the Company to
cover organizational costs incurred during the months leading up to the Company
formally organizing and authorizing the issuance of common stock to meet
anticipated funding needs. During 1998, this organizer received common stock
amounting to 5,000 shares, at $10.00 per share, in lieu of reimbursement for
funds advanced. The funds advanced earned no interest.
30
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flow Information
- ---------------------
Cash equivalents include amounts due from banks and interest-bearing deposits
with banks that have original maturities of 90 days or less.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133 precludes a held to maturity security from being
designated as a hedged item; however, at the date of initial application of this
Statement, an entity is permitted to transfer any held to maturity security into
the available for sale or trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported consistent with the
requirements of Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Such transfers do not raise an issue regarding an
entity's intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 1999. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on accounting for the costs
of computer software developed or obtained for internal use and provides
guidance for determining whether computer software is for internal use. The
Company will adopt SOP 98-1 in the first quarter of 1999 and does not believe
the effect of adoption will be material.
2. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Government agency
securities $ 5,716,790 $ 4,048 $ (1,654) $ 5,719,184
Corporate securities 3,533,210 1,322 (13,295) 3,521,237
Mortgage-backed securities 3,624,154 - (21,007) 3,603,147
----------------- ----------------- ----------------- -----------------
Total debt securities 12,874,154 5,370 (35,956) 12,843,568
Equity securities 307,200 - - 307,200
----------------- ----------------- ----------------- -----------------
Total $ 13,181,354 $ 5,370 $ (35,956) $ 13,150,768
================= ================= ================= =================
</TABLE>
31
<PAGE>
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investments in debt securities
available for sale by contractual maturity are shown below.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------------- -----------------
<S> <C> <C>
Due after one year through five years $ 2,506,934 $ 2,508,650
Due after five years through ten years 4,228,985 4,229,802
Due after ten years 6,138,235 6,105,116
----------------- -----------------
Total $ 12,874,154 $ 12,843,568
================= =================
</TABLE>
Investment securities available for sale with a carrying value of $7,554,427 at
December 31, 1998, were pledged to secure public deposits and other purposes as
required by law.
3. LOANS RECEIVABLE
Loans receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
Real estate loans:
Residential $ 1,653,004
Home equity 997,740
Commercial 858,000
Commercial 163,122
Consumer loans 860,406
-----------------
4,532,272
Less:
Deferred loan fees, net 9,152
Allowance for loan losses 98,988
-----------------
Total $ 4,424,132
=================
</TABLE>
Aggregate loans of $60,000 or more extended to executive officers,
directors, and corporations in which they are beneficially interested as
stockholders, executive officers, or directors were $239,470 at December
31, 1998. An analysis of these related party loans follows:
1997 Additions Repayments 1998
----------------- ----------------- ----------------- -----------------
$ - $ 239,470 $ - $ 239,470
The Company's primary business activity is with customers located within its
local trade area. Residential, consumer, and commercial loans are granted. At
year end 1998, a single commercial real estate loan for approximately $743,000
or 16.4 percent of the Company's total loan portfolio represented the only
concentration exceeding ten percent. Although the Company has a diversified loan
portfolio at December 31, 1998, the repayment of these loans is dependent upon
the local economic conditions in its immediate trade area.
32
<PAGE>
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the year ended December 31, 1998,
is as follows:
Balance, January 1 $ -
Add provisions charged to operations 100,000
Less loans charged off 1,012
-----------------
Balance, December 31 $ 98,988
=================
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1998
-----------------
Leasehold improvements $ 34,863
Furniture and equipment 95,303
-----------------
130,166
Less accumulated depreciation and amortization 4,006
-----------------
Total $ 126,160
=================
Depreciation and amortization expense for the year ended December 31, 1998, was
$4,006.
6. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the FHLB System. As a member, the Bank maintains an
investment in the capital stock of the FHLB of Pittsburgh, at cost, in an amount
not less than the greater of one percent of its outstanding home loans or five
percent of its outstanding notes payable to the FHLB of Pittsburgh as calculated
at December 31, of each year.
7. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $773,786 at December 31, 1998. Deposits in excess
of $100,000 are not federally insured.
The scheduled maturities of time certificates of deposit as of December 31,
1998, are as follows:
Within one year $ 3,286,958
Beyond one year but within two years 811,685
Beyond two years but within three years 226,676
Beyond three years but within five years 64,226
-----------------
Total $ 4,389,545
=================
In the normal course of business, deposit relationships have been established
with directors, executive officers, and their associates. Deposits of related
parties amounted to $1,810,000 or 12.9 percent of the Company's total deposits
as of December 31, 1998. Management believes liquidity is adequate to compensate
for these deposit levels.
33
<PAGE>
8. FHLB ADVANCE
On December 22, 1998, the Bank entered into a five-year "Convertible Select"
fixed commitment advance arrangement for $5,000,000 with the Federal Home Loan
Bank of Pittsburgh at an interest rate of 4.32 percent. The rate may be reset at
the FHLB's discretion on a quarterly basis, after June 22, 1999, based on the
three-month LIBOR rate. At each rate change, the Bank may exercise a put option
and satisfy the obligation without penalty.
The Bank has the capability to borrow additional funds through a multi-line
credit arrangement with the FHLB. The FHLB credit arrangements typically are
subject to annual renewal and are secured by a blanket security agreement on
certain investment securities, qualifying residential mortgages, and the Bank's
investment in FHLB stock. As of December 31, 1998, the Bank's maximum borrowing
capacity with the FHLB was $7.0 million.
9. OTHER EXPENSES
The following is an analysis of other expenses:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Professional fees $ 115,675 $ -
Stationery, printing, supplies, and postage 59,413 -
Amortization of intangible assets 7,908 -
Other 63,893 6,323
----------------- -----------------
Total $ 246,889 $ 6,323
================= =================
</TABLE>
Malizia, Spidi, Sloane & Fisch, P.C., attorneys at law, are and will continue
providing legal and consulting services to the Company and the Bank. An
individual that is an organizer, Board member, and shareholder of the Company is
a principal of Malizia, Spidi, Sloane & Fisch, P.C. For the year ended December
31, 1998, the Company paid approximately $38,000 in legal fees to this firm.
10. INCOME TAXES
The components of income taxes for the years ended December 31, are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Current payable:
Federal $ - $ -
State - -
----------------- -----------------
- -
Deferred taxes 229,071 8,764
Adjustment to valuation allowance for deferred tax assets (229,071) (8,764)
----------------- -----------------
Total $ - $ -
================= =================
</TABLE>
34
<PAGE>
INCOME TAXES (Continued)
The following temporary differences gave rise to the net deferred tax assets:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net unrealized loss on securities $ 10,400 $ -
Allowance for loan losses 31,574 -
Organization costs 66,063 8,764
Net operating loss carryforward 140,800 -
----------------- -----------------
Total gross deferred tax assets 248,837 8,764
Less valuation allowance 248,235 8,764
----------------- -----------------
Deferred tax assets after allowance 602 -
----------------- -----------------
Deferred tax liabilities:
Premises and equipment 378 -
Loan origination costs 224 -
----------------- -----------------
Total gross deferred tax liabilities 602 -
----------------- -----------------
Net deferred tax assets $ - $ -
================= =================
</TABLE>
The Company represents an entity that has been in existence for less than two
years and has accumulated a net operating loss since its inception. As such,
management has established a valuation allowance for its deferred tax assets,
primarily the accumulated future tax benefits attributed to the operating loss
carryforward and loan loss provisions since it is more likely than not that
realization of these deferred assets cannot be fully supported at December 31,
1998 and 1997.
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ------------------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Provision at statutory rate $ (169,957) 34.0% $ (8,764) 34.0%
State income tax benefit,
net of federal tax (39,722) 7.9 - -
Adjustment of valuation
allowance for deferred
tax assets 229,071 (45.8) 8,764 (34.0)
Other, net (19,392) 3.9 - -
----------------- ------------------ ----------------- -----------------
Actual tax expense
and effective rate $ - -% $ - -%
================= ================== ================= =================
</TABLE>
The Bank is subject to the Pennsylvania Mutual Thrift Institution's tax which is
calculated at 11.5 percent of earnings based on generally accepted accounting
principles with certain adjustments. At December 31, 1998, the Bank has
available a net operating loss carryforward of $466,000 for state tax purposes.
If unused, the carry-forward will expire 2001.
At December 31, 1998, the Company has available a net operating loss
carryforward of $297,000 for federal income tax purposes. If unused, the
carryforwards will expire 2018. The Company also has available a net operating
loss carryforward of $66,000 for state income tax purposes which will expire
2008.
35
<PAGE>
11. COMMITMENTS
In the normal course of business, the Company makes various commitments which
are not reflected in the accompanying consolidated financial statements. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments is represented by the contractual amounts
as disclosed. The Company minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval and review procedures and
collateral requirements as deemed necessary. Commitments generally have fixed
expiration dates within one year of their origination.
The off-balance sheet commitments were comprised of the following:
1998
-----------------
Commitments to extend credit:
Fixed rate $ 611,700
Variable rate 2,326,000
-----------------
Total $ 2,937,700
=================
The range of interest rates on fixed rate loan commitments was 7.00 percent to
9.74 percent at December 31, 1998.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement. These
commitments are comprised primarily of available personal lines of credit and
loans approved but not yet funded. Fees from the issuance of the credit lines
are generally recognized over the period of maturity.
The Company is committed under two noncancellable operating leases for both of
the Bank's office facilities with remaining terms through 2007. At December 31,
1998, the minimum rental commitments under these leases are as follows:
1999 $ 127,962
2000 127,962
2001 127,962
2002 127,962
2003 127,962
Thereafter 372,571
-----------------
Total $ 1,012,381
=================
Occupancy and equipment expenses include rental expenditures of $34,701 for
1998.
12. REGULATORY MATTERS
Dividend Restrictions
- ---------------------
The Bank is subject to a dividend restriction which generally limits the amount
of dividends that can be paid by an OTS-chartered bank. OTS regulations require
the Bank to give the OTS 30 days notice of any proposed declaration of dividends
to the Company, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends by the Bank to the Company.
36
<PAGE>
12. REGULATORY MATTERS (Continued)
Regulatory Capital Requirements
- -------------------------------
The Company, on a consolidated basis, is subject to various regulatory capital
requirements administered by the federal banking agencies. The Office of Thrift
Supervision sets forth capital standards applicable to the Company. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Capital adequacy guidelines involve quantitative measures of the
Company's and the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and 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 the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier I Capital (as defined in the regulations) to Risk-weighted Assets, and
of Tangible and Core Capital (as defined in the regulations) to Adjusted Assets
(as defined). Management believes, as of December 31, 1998, the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the appropriate
regulatory authorities categorized the Company and the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized the Company and the Bank must maintain minimum Tangible,
Core, and Risk-based ratios. There have been no conditions or events since that
notification that management believes have changed the Company's or the Bank's
category.
The following table reconciles the Company's capital under generally accepted
accounting principles to OTS regulatory capital:
1998
-----------------
Total stockholder's equity $ 5,153,653
Unrealized loss on securities 30,586
Intangible asset (941,886)
-----------------
Tier I, core, and tangible capital 4,242,353
Allowance for loan losses 98,988
-----------------
Total risk-based capital $ 4,341,341
=================
37
<PAGE>
12. CAPITAL MATTERS (Continued)
The consolidated capital position of the Company does not materially differ from
the Bank's; therefore, the following table sets forth the Company's capital
position and minimum requirements as of December 31, 1998:
<TABLE>
<CAPTION>
Amount Ratio
------------------ -----------------
<S> <C> <C>
Total Capital (to Risk-weighted Assets)
- ---------------------------------------
Actual $ 4,341,341 32.3 %
For Capital Adequacy Purposes 1,074,640 8.0
To Be Well Capitalized 1,343,300 10.0
Tier I Capital (to Risk-weighted Assets)
- ----------------------------------------
Actual $ 4,242,353 31.6 %
For Capital Adequacy Purposes 537,320 4.0
To Be Well Capitalized 805,980 6.0
Core Capital (to Adjusted Assets)
- ---------------------------------
Actual $ 4,242,353 18.7 %
FDIC Denovo Capital Required 1,812,517 8.0
For Capital Adequacy Purposes 679,694 3.0
To Be Well Capitalized 1,132,823 5.0
Tangible Capital (to Adjusted Assets)
- -------------------------------------
Actual $ 4,242,353 18.7 %
For Capital Adequacy Purposes 339,847 1.5
To Be Well Capitalized N/A N/A
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
1998, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
----------------- -----------------
<S> <C> <C>
Financial assets:
Cash and due from banks and interest-bearing
deposits with other banks $ 5,929,243 $ 5,929,243
Investment securities available for sale 13,150,768 13,150,768
Loans receivable 4,424,132 4,496,056
Accrued interest receivable 165,446 165,446
----------------- -----------------
Total $ 23,669,589 $ 23,741,513
================= =================
Financial liabilities:
Deposits $ 13,992,384 $ 14,020,930
FHLB advance 5,000,000 5,000,000
Accrued interest payable 94,345 94,345
----------------- -----------------
Total $ 19,086,729 $ 19,115,275
================= =================
</TABLE>
38
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas. As many
of these assumptions result from judgments made by management based upon
estimates which are inherently uncertain, the resulting estimated fair values
may not be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in the assumptions on which the
estimated fair values are based may have a significant impact on the resulting
estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment, are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed estimates using discounted cash flows in determining the
estimated fair value of financial instruments for which quoted market prices
were not available based upon the following assumptions:
Cash and Due from Banks, Interest-bearing Deposits with Other Banks, Accrued
- --------------------------------------------------------------------------------
Interest Receivable, and Accrued Interest Payable
- -------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities Available for Sale
- ----------------------------------------
The fair value of investment securities available for sale is equal to the
available quoted market price. If no quoted market price is available, fair
value is estimated using the quoted market price for similar securities.
Loans Receivable, Deposits, and FHLB Advance
- --------------------------------------------
The fair value of loans is estimated using discounted contractual cash flows
generated using prepayment estimates. Discount rates are based upon current
market rates generally being offered for new loan originations with similar
credit and payment characteristics. Savings, checking, and money market deposit
accounts are valued at the amount payable on demand as of year end. Fair values
for time deposits and the FHLB advance are estimated using a discounted cash
flow calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits and
borrowings of similar remaining maturities.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 11.
39
<PAGE>
14. FORMATION CAPITALIZATION AND INITIAL PUBLIC OFFERING
Initial capitalization of the Company occurred through the subscription and
issuance of common stock in a private placement which was exclusively offered to
the organizers of the Company during the first quarter of 1998. A total of
29,998 shares, at an offering price of $10.00 per share, were issued and remain
outstanding.
The Company issued 537,438 shares of common stock at $10.00 per share in the IPO
completed in October 1998. The Company purchased all of the common stock issued
by the Bank using proceeds received from the IPO. Total initial Bank
capitalization was $5,425,000.
15. BRANCH PURCHASE AND ASSUMPTION AGREEMENT
On March 24, 1998, the Company, through its organizers, entered into a Branch
Purchase and Deposit Assumption Agreement (the "Agreement"), with First
Commonwealth Financial Corp. ("FCFC"), for the acquisition of certain assets and
the assumption of certain deposit liabilities related to FCFC's branch offices
located at 116 East College Avenue and 1276 North Atherton Street, State
College, Pennsylvania. The effective closing date of the transactions occurred
on October 23, 1998, in conjunction with the initiation of banking operations.
Pursuant to the Agreement, the Company, through its subsidiary, the Bank: (i)
assumed approximately $10.2 million of deposit liabilities; (ii) purchased, at
book value, loans from these offices that are secured by deposit accounts and
unsecured loans created by overdraft line arrangements with the customer; (iii)
purchased, at book value, furniture, fixtures, equipment, and leasehold
improvements owned by Commonwealth and located at each branch office; (iv)
purchased the safe deposit box business conducted at the branches; (v) assumed
the lease contracts for each office; and (vi) purchased all cash funds on hand
at each office.
In consideration for the assumption of the deposit liabilities, the Company paid
FCFC a deposit premium of ten percent. The premium was paid using cash (nine
percent) and common stock of the Company (one percent).
16. STOCK OPTION PLAN
The Company's Board of Directors adopted a Stock Option Plan (the "Plan"),
subject to stockholder approval of the Plan. Pursuant to the Plan, up to 86,615
shares of common stock are to be reserved under the Company's authorized but
unissued shares for issuance upon exercise of granted stock options by officers,
directors, key employees, and other persons from time to time. On October 23,
1998, the Board authorized the granting of 82,500 stock options to officers,
directors, and certain employees. The per share exercise price of a stock option
shall be $10 per share which represents the fair market value of the stock at
the completion of the initial public offering on October 23, 1998. The purpose
of the Plan is to attract and retain qualified personnel for positions of
substantial responsibility and to provide additional incentive to certain
officers, directors, key employees, and other persons in promoting the success
of the business of the Company and the Bank. Options awarded to employees and
officers become first exercisable at a rate of 25 percent and for non-employee
directors at a rate of 33 1/3 percent annually, commencing on the date of grant.
The Plan, which shall become effective upon the date of approval by the
stockholders of the Company, provides for option terms of ten years, after which
time no awards may be made.
40
<PAGE>
17. PARENT COMPANY
Following are condensed financial statements for Nittany Financial Corp.:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash $ 9,327 $ 29,449
Investment in subsidiary bank 4,930,945 -
Other assets 361,666 70,000
-------------------- --------------------
TOTAL ASSETS $ 5,301,938 $ 99,449
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 148,285 $ 125,226
Stockholders' equity 5,153,653 (25,777)
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,301,938 $ 99,449
==================== ====================
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Period From
October 9, 1997,
the Date of
Year Ended Inception, to
December 31, December 31,
1998 1997
-------------------- --------------------
<S> <C>
INCOME $ 16,538 $ 295
EXPENSES 251,064 26,072
-------------------- --------------------
Loss before equity in undistributed net loss of subsidiary (234,526) (25,777)
Equity in undistributed net loss of subsidiary (287,174) -
-------------------- --------------------
NET LOSS $ (521,700) $ (25,777)
==================== ====================
</TABLE>
41
<PAGE>
17. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
October 9, 1997,
the Date of
Year Ended Inception, to
December 31, December 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (521,700) $ (25,777)
Adjustments to reconcile net loss to
net cash used for operating activities:
Equity in undistributed net loss of subsidiary 463,468 -
Other, net (146,779) 5,226
-------------------- --------------------
Net cash used for operating activities (205,011) (20,551)
-------------------- --------------------
INVESTING ACTIVITIES
Initial capitalization of subsidiary bank (5,425,000) -
-------------------- --------------------
Net cash used for investing activities (5,425,000) -
-------------------- --------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,609,889 -
Advances from organizers - 50,000
-------------------- --------------------
Net cash provided by financing activities 5,609,889 50,000
-------------------- --------------------
Decrease in cash (20,122) 29,449
CASH AT BEGINNING OF PERIOD 29,449 -
-------------------- --------------------
CASH AT END OF PERIOD $ 9,327 $ 29,449
==================== ====================
</TABLE>
42
<PAGE>
Item 8. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- ---------------------------------------
David K. Goodman, Jr., is the President and Chief Executive Officer of
D. C. Goodman & Sons, Inc., a Huntingdon based contracting firm, which
specializes in specialty construction for industry, institutions, and commercial
customers in the fields of fire protection sprinkler systems, mechanical, and
electrical contracting. Mr. Goodman is a member of the board of directors of
Huntingdon County United Way, J. C. Blair Memorial Hospital, and Huntingdon
County Business and Industry. He is also a member of the Trustee's Council of
Juniata College. Mr. Goodman received his education at Juniata College and holds
numerous professional memberships in fire protection and contracting
organizations.
William A. Jaffe, the President and owner of The Jaffe Group, a Human
Resource Consultancy, headquartered in State College, Pennsylvania, which he
established in January 1996. Previously, he was Compensation and Human Resource
Practice Leader for the Mid-Atlantic Region of Alexander & Alexander Consulting
Group. He received his Bachelor of Arts degree in journalism from the
Pennsylvania State University and Masters of Science degree in Management from
the University of Illinois. He is President of The Mount Nittany Conservancy and
on the Executive Committee for the Nittany Lion Club, the Penn State College of
Communications Alumni Society, and the Penn State Hillel Foundation. For two
years, he served as the chair of the Camber of Business & Industry of Center
County's Human Resource Committee. He is an alumnus of several Pennsylvania
State University organizations, including Lions Paw, Skull and Bones Honor
Society and The Daily Collegian. He was a board member of Acme and Chairman of
its Government Relations Committee and an adjunct associate professor at The
George Washington University from 1991 to 1995. In 1996, he was named a Penn
State Alumni Fellow.
Samuel J. Malizia is the Chairman of the Board of the Company and the
Bank. Mr. Malizia is the managing partner of the law firm of Malizia, Spidi,
Sloane & Fisch, P.C., a law firm headquartered in Washington, DC with a State
College, Pennsylvania office. For over 18 years, Mr. Malizia has specialized in
transactional, securities and regulatory matters for financial institutions and
related entities. He received a Bachelor of Science Degree with Distinction in
accounting from the Pennsylvania State University and a Juris Doctor Degree from
the George Washington University. He served as Attorney Advisor to Special Trial
Judge Francis Cantrel at the United States Tax Court and attended the Masters of
Law in Taxation program at the Georgetown University. He was associate editor of
the Tax Lawyer. He is a member of the Pennsylvania and District of Columbia
bars, the U.S. Tax Court, U.S. Claims Court, U.S. Court of Appeals for the
District of Columbia and a member of the Federal Bar Association and American
Bar Association. He is an alumnus of several Pennsylvania State Universities
organizations, including Lions Paw, Skull and Bones Honor Society, Beta Alpha
Psi and Omicron Delta Kappa. He serves on the Board of Directors of the Lions
Paw Alumni Society and the Mount Nittany Conservancy.
43
<PAGE>
J. Garry McShea has been owner and founder of the J.G. McShea
Construction Company, Boalsburg, Pennsylvania since 1978. McShea Construction
specializes in custom home construction, remodeling projects,
commercial/residential rental properties and land development. Prior to this,
Mr. McShea was employed by Certain Teed Corporation, Valley Forge, Pennsylvania,
as a Residential Building Material Specialist. Mr. McShea is a past President
and 22 year member of the Builders Association of Central Pennsylvania. He is a
Director of the Tussey Mountain Ski Corporation and serves on the Harris
Township Planning Commission. Mr. McShea received a Bachelor of Science Degree
in Marketing from the Pennsylvania State University College of Business.
Donald J. Musso is the founder of FinPro, Inc., a consulting and
investment banking firm which specializes in providing advisory services
nationally to the financial institutions industry. Mr. Musso has a Bachelor of
Science in Finance from Villanova University and an MBA in Finance from
Fairleigh Dickinson University. Mr. Musso's corporation has represented dozens
of financial institutions nationally in connection with business plans,
appraisals, asset liability management, strategic planning, branch acquisitions
and de novo financial institutions. Prior to establishing FinPro, he had direct
industry experience, having managed the Corporate Planning and Mergers and
Acquisitions departments for Meritor Financial Group, a $20 billion dollar
institution in Philadelphia. Prior to that, he was responsible for the banking,
thrift and real estate consulting practice in New Jersey for DeLoitte, Haskins
and Sells. He is also an instructor of strategic planning for the Stonier
Graduate School of Banking.
David Z. Richards, Jr. is President and CEO of the Company and the
Bank. Mr. Richards was President and Chief Executive Officer of Mifflinburg Bank
and Trust Company of Mifflinburg, Pennsylvania from 1991 until 1997. From 1978
until 1990, he served in various capacities, including Vice President and
Financial Officer of The First National Bank of Danville, Pennsylvania. In 1997
he was appointed to the Executive Committee of the Pennsylvania Bankers
Association, for which he has chaired and served on several committees. He
formerly served as President of LUN Data Inc., a multi-owned data processing
consortium. He is a graduate of Susquehanna University in Finance and The
Stonier Graduate School of Banking.
D. Michael Taylor is an architect, real estate developer and
entrepreneur, who has resided in the State College area for more than 20 years.
Mr. Taylor has a Masters of Architecture degree from Kansas State University.
Upon graduation, he spent several years in commercial architecture for Phillips
Petroleum and other firms, specializing in retail construction for national
companies. In addition to his architecture practice, Mr. Taylor is part owner of
G-Wal-Taylor, a firm specializing in industrial pump sales to the paper and pulp
industry.
Executive Officers Who Are Not Directors
Richard C. Barrickman was appointed Senior Vice President of the Bank
upon completion of the formation of the Bank on October 23, 1998. Mr. Barrickman
was employed by PNC Bank, N.A. ("PNC") and its predecessors through mergers.
Prior to merger with PNC and its predecessors in 1982, Mr. Barrickman was the
President of Mt. Nittany Savings and Loan Association. Mr. Barrickman is a
native of State College, Pennsylvania.
John E. Arrington was appointed Vice President of Retail Banking upon
completion of the formation of the Bank on October 23, 1998. Previous to his
appointment with the Bank, Mr. Arrington was employed by PNC and its
predecessors, serving in a variety of capacities, most recently as Vice
President. Mr. Arrington is President of the Board of the Nittany Valley
Symphony.
44
<PAGE>
Item 10. Executive Compensation
- --------------------------------
Director Compensation
Directors and advisory directors have received no compensation for
their services, since the incorporation of the Company in 1997.
Executive Officer Compensation
The Company has no full time employees, but relies on the employees of
the Bank for the limited services required by the Company. All compensation paid
to officers and employees is paid by the Bank.
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the chief executive officer. No
executive officer of either the Bank or the Company had a salary and bonus
during the years ended December 31, 1998 that exceeded $100,000 for services
rendered in all capacities to the Bank or the Company. Mr. Richards employment
with the Bank commenced on October 23, 1998. Prior to that date, he was
compensated by the Company during the formation of the Bank.
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------
All
Name and Fiscal Other Annual Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation ($)
- ------------------- ---- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
David Z. Richards
President and
Chief Executive
Officer 1998 $ 76,666 -- -- --
</TABLE>
Employment Agreement. The Company entered into an employment agreement
(the "Agreement") with David Z. Richards, President and Chief Executive Officer
in December 1997. Mr. Richards's base salary under the Agreement is $100,000.
Under the terms of the Agreement, Mr. Richards salary was 72% of the $100,000
base salary prior to the time the Bank opened for business. The Agreement has a
term of three years and may be terminated by the Company for "just cause" as
defined in the Agreement. If the Company terminates Mr. Richards without just
cause, Mr. Richards will be entitled to a continuation of his salary from the
date of termination through the remaining term of the Agreement. The Agreement
contains a provision stating that in the event of the termination of employment
in connection with a change in control of the Company, Mr. Richards will be paid
a lump sum amount equal to 2.99 times his five year average annual taxable
compensation. If such payments had been made under the Agreement as of December
31, 1998, such payments would have equaled approximately $229,000. The Agreement
may be renewed annually by the Company's Board of Directors upon a determination
of satisfactory performance within the Board's sole discretion. The Agreement
was renewed for an additional year (i.e., until December 31, 2001) by the Board
of Directors in January 1999. If Mr. Richards shall become disabled during the
term of the Agreement, he shall continue to receive payment of 80% of the base
salary for a period of 3 months and 50% of such base salary for a period of 12
months, but not exceeding the remaining term of the Agreement.
45
<PAGE>
Such payments shall be reduced by any other benefit payments made under other
disability programs in effect for the Bank's employees.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Based upon the records of the Company's transfer agent, the following
table sets forth, as of February 28, 1999, persons or groups who own more than
5% of the Common Stock and the ownership of all executive officers and directors
of the Company as a group. Other than as noted below, management knows of no
person or group that owns more than 5% of the outstanding shares of Common Stock
at that date.
<TABLE>
<CAPTION>
Percent of Shares of
Amount and Nature of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership(1) Outstanding(%)
- ------------------------------------ ----------------------- --------------
<S> <C> <C>
Samuel J. Malizia 42,000 7.27
David K. Goodman, Jr. 30,000 5.20
Thistle Group Holdings, Co. 30,000 5.20
All directors and executive officers of the
Company as a group (9 persons) 139,899 24.23%
</TABLE>
- -----------------------------
(1) Includes shares of Common Stock held directly as well as by spouses or
minor children, in trust and other indirect ownership, over which
shares the individuals effectively exercise sole voting and investment
power, unless otherwise indicated.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to officers, directors, and employees. The loans
have been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with the Bank's other customers, and do not involve
more than the normal risk of collectibility, or present other unfavorable
features.
Item 13. Exhibits, List and Reports on Form 8-K
- -----------------------------------------------
(a) The following exhibits are included in this Report or incorporated
herein by reference:
<TABLE>
<CAPTION>
<S> <C>
3(i) Amended Articles of Incorporation of Nittany Financial Corp. **
3(ii) Bylaws of Nittany Financial Corp. **
4 Specimen Stock Certificate of Nittany Financial Corp. **
10 Employment Agreement between the Bank and David Z. Richards **
21 Subsidiaries of the Registrant (See "Item 1- Business")
27 Financial Data Schedule (electronic filing only)
</TABLE>
- --------------------
** Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-57277) declared effective
by the SEC on July 31, 1998.
(b) None.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of April 12, 1999.
NITTANY FINANCIAL CORP.
By: /s/ David Z. Richards
------------------------------------
David Z. Richards
President, C.E.O. and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of April 12, 1999.
/s/ Samuel J. Malizia /s/ David Z. Richards
- ----------------------------------- ---------------------------------
Samuel J. Malizia David Z. Richards
Chairman of the Board of Directors President, C.E.O. and Director
(Principal Executive Officer and
Principal Financial Officer)
/s/ Donald J. Musso /s/William A. Jaffee
- ----------------------------------- ---------------------------------
Donald J. Musso William A. Jaffe
Director Director and Secretary
/s/ D. Michael Taylor /s/ J. Garry McShea
- ----------------------------------- ---------------------------------
D. Michael Taylor J. Garry McShea
Director Director
/s/ David K. Goodman, Jr.
- -----------------------------------
David K. Goodman, Jr.
Director
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 307
<INT-BEARING-DEPOSITS> 5,622
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,151
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,523
<ALLOWANCE> 99
<TOTAL-ASSETS> 24,791
<DEPOSITS> 13,992
<SHORT-TERM> 0
<LIABILITIES-OTHER> 645
<LONG-TERM> 5,000
0
0
<COMMON> 58
<OTHER-SE> 5,096
<TOTAL-LIABILITIES-AND-EQUITY> 24,791
<INTEREST-LOAN> 25
<INTEREST-INVEST> 61
<INTEREST-OTHER> 101
<INTEREST-TOTAL> 187
<INTEREST-DEPOSIT> 89
<INTEREST-EXPENSE> 95
<INTEREST-INCOME-NET> 92
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 505
<INCOME-PRETAX> (500)
<INCOME-PRE-EXTRAORDINARY> (500)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (500)
<EPS-PRIMARY> (3.62)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.49
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 99
<ALLOWANCE-DOMESTIC> 99
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
