UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ___ to ___
Commission File Number 333-57277
----------------------------------
Nittany Financial Corp.
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2925762
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
116 E. College Avenue, State College, Pennsylvania 16801
--------------------------------------------------------
(Address of principal executive offices)
(814) 234 - 7320
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 .
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, par value $.10 per share
Outstanding at November 08, 1999: 577,436
<PAGE>
NITTANY FINANCIAL CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
September 30, 1999 and December 31, 1998 3
Consolidated Statement of Income (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 4
Consolidated Statement of Income (Unaudited)
for the Three Months ended September 30, 1999 and 1998 5
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) 6
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 1999 and 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities 18
Item 4. Submissions of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8 - K 18
SIGNATURES 19
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ---------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 339,986 $ 307,443
Interest-bearing deposits with other banks 3,279,267 5,621,800
Investment securities available for sale 16,144,042 13,150,768
Investment securities held to maturity (market
value of $1,652,336) 1,710,672 -
Loans receivable (net of allowance for loan losses
of $157,764 and $98,988 ) 23,748,711 4,424,132
Premises and equipment 182,693 126,160
Intangible assets 900,504 941,886
Accrued interest and other assets 296,606 218,394
------------------ --------------
TOTAL ASSETS $ 46,602,481 $ 24,790,583
================== ==============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 2,567,289 $ 777,400
Interest-bearing demand 4,818,718 2,146,171
Money market 14,035,933 5,409,434
Savings 1,451,485 1,269,834
Time 10,387,375 4,389,545
------------------ --------------
Total deposits 33,260,800 13,992,384
FHLB advances 8,600,000 5,000,000
Accrued interest payable and other liabilities 266,551 144,546
Commitment to purchase investment security - 500,000
------------------ --------------
TOTAL LIABILITIES 42,127,351 19,636,930
------------------ --------------
STOCKHOLDER'S EQUITY
Serial perferred 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 57,744
Additional paid-in capital 5,652,145 5,652,145
Retained deficit (768,729) (525,650)
Accumulated other comprehensive loss (466,030) (30,586)
------------------ --------------
TOTAL STOCKHOLDERS' EQUITY 4,475,130 5,153,653
------------------ --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 46,602,481 $ 24,790,583
================== ==============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------------ --------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 815,577 $ -
Investment securities 728,894 -
Interest-bearing deposits with other banks 81,010 1,996
------------------ --------------
Total interest and dividend income 1,625,481 1,996
------------------ --------------
INTEREST EXPENSE
Deposits 724,560 -
FHLB advances 240,548 -
------------------ --------------
Total interest expense 965,108 -
------------------ --------------
NET INTEREST INCOME 660,373 1,996
Provision for loan losses 60,000 -
------------------ --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 600,373 1,996
------------------ --------------
NONINTEREST INCOME
Service fees on deposit accounts 88,319 -
Investment securities gains, net 1,342 -
Other income 25,606 -
------------------ --------------
Total noninterest income 115,267 -
------------------ --------------
NONINTEREST EXPENSE
Compensation and employee benefits 394,428 79,730
Occupancy and equipment 144,625 439
Data processing 94,452 -
Goodwill amortization 37,427 -
Professional fees 77,664 104,175
Printing and supplies 43,828 118
Other 166,295 51,066
------------------ --------------
Total noninterest expense 958,719 235,528
------------------ --------------
Loss before income taxes (243,079) (233,532)
Income taxes - -
------------------ --------------
NET LOSS $ (243,079) $ (233,532)
================== ==============
LOSS PER SHARE:
Basic $ ($0.42) $ ($10.99)(1)
Diuluted ($0.42) N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 577,436 21,259
Diuluted 577,436 N/A
</TABLE>
- ------------------------
(1) - Loss per share is calculated using the weighted average number of shares
outstanding from February 18, 1998, the first date that stock was issued.
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------------ --------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 410,363 $ -
Investment securities 277,890 -
Interest-bearing deposits with other banks 20,618 788
------------------ --------------
Total interest and dividend income 708,871 788
------------------ --------------
INTEREST EXPENSE
Deposits 310,235 -
FHLB advances 115,474 -
------------------ --------------
Total interest expense 425,709 -
------------------ --------------
NET INTEREST INCOME 283,162 788
Provision for loan losses 60,000 -
------------------ --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 223,162 788
------------------ --------------
NONINTEREST INCOME
Service fees on deposit accounts 32,816 -
Investment securities gains, net - -
Other income 13,362 -
------------------ --------------
Total noninterest income 46,178 -
------------------ --------------
NONINTEREST EXPENSE
Compensation and employee benefits 158,188 38,017
Occupancy and equipment 49,559 -
Data processing 40,809 -
Goodwill amortization 11,869 -
Professional fees 14,790 100,453
Printing and supplies 17,766 -
Other 66,412 31,773
------------------ --------------
Total noninterest expense 359,393 170,243
------------------ --------------
Loss before income taxes (90,053) (169,455)
Income taxes - -
------------------ --------------
NET LOSS $ (90,053) $ (169,455)
================== ==============
LOSS PER SHARE
Basic $ ($0.16) ($ 6.22)
Diuluted ($0.16) N/A
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 577,436 27,228
Diuluted 577,436 N/A
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total Compre-
Common Paid-in Retained Comprehensive Stockholders' hensive
Stock Capital Deficit Loss Equity Loss
-------------- ------------ ---------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 57,744 $ 5,652,145 $(525,650) $ (30,586) $ 5,153,653
Net loss (243,079) (243,079) $ (243,079)
Other comprehensive loss:
Unrealized loss on available for
sale securities
Comprehensive loss (435,444) (435,444) (435,444)
-------------- ------------ ---------- ------------- --------------- ------------
Balance, September 30, 1999 $ 57,744 $ 5,652,145 $(768,729) $ (466,030) $ 4,475,130 $ (678,523)
============== ============ ========== ============= =============== =============
Components of comprehensive loss: 1999
Change in net unrealized loss on ----
investment securities available
for sale $ (434,558)
Realized gains included in net
income, net of tax (886)
------------
Total $ (435,444)
============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------------ --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (243,079) $ (233,532)
Adjustments to reconcile net loss to
net cash used for operating activities:
Provision for loan losses 60,000 -
Depreciation, amortization, and accretion,net 115,049 -
Investment securities gains, net (1,342) -
Increase in accrued interest receivable (102,554) -
Increase in accrued interest payable 132,237 -
Other, net 14,110 63,936
------------------ --------------
Net cash used for operating activities (25,579) (169,596)
------------------ --------------
INVESTING ACTIVITIES
Purchase of one year certificate of deposit - (10,548)
Investment securities available for sale:
Purchases (6,851,792) -
Proceeds from sales 428,554 -
Principal repayments 2,462,572 -
Investment securities held to maturity:
Purchases (1,945,065) -
Principal repayments 234,768 -
Net increase in loans receivable (19,395,256) -
Purchase of premises and equipment (86,608) (2,649)
------------------ --------------
Net cash used for investing activities (25,152,827) (13,197)
------------------ --------------
FINANCING ACTIVITIES
Net increase in deposits 19,268,416 -
Proceeds from long-term FHLB advances 3,600,000 -
Net proceeds from the sale of common stock - 250,000
------------------ --------------
Net cash provided by financing activities 22,868,416 250,000
------------------ --------------
Increase (decrease) in cash and cash equivalents (2,309,990) 67,207
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,929,243 29,449
------------------ --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,619,253 $ 96,656
================== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 832,871 $ -
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
7
<PAGE>
NITTANY FINANCIAL CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Nittany Financial Corp. (the "Company")
includes its wholly-owned subsidiaries, Nittany Bank (the "Bank") and Nittany
Asset Management, Inc. All significant intercompany items have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore, do not
necessarily include all information that would be included in audited financial
statements. The information furnished reflects all adjustments that are, in the
opinion of management, necessary for a fair statement of the results of
operations. All such adjustments are of a normal recurring nature. The results
of operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the fiscal year ended
December 31, 1999 or any other interim period.
These statements should be read in conjunction with the consolidated financial
statements and related notes for the year ended December 31,1998, which are
incorporated by reference to the Company's Annual Report on Form 10-KSB.
Note 2 - EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. At September 30, 1999 there was no dilutive effect on common shares
of stock outstanding.
Note 3 - STOCK OPTION PLAN
On October 23, 1998, the Board of Directors adopted a stock option plan for the
directors, officers, and employees which was approved by the stockholders on May
24, 1999. An aggregate of 86,615 shares of authorized but unissued common stock
of the Company were reserved for future issuance under this plan. The stock
options have expiration terms of ten years subject to certain extensions and
terminations. The per share exercise price of a stock option shall be, at a
minimum, equal to the fair value of a share of common stock on the date the
option is granted. Non-qualified and qualified stock options were granted for
the purchase of $82,500 shares, exercisable at the market price of $10.00. Of
this amount, 48,000 and 34,500 stock options were granted to nonemployee
directors and officers and employees, respectively. 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.
8
<PAGE>
The following table presents share data related to the outstanding options:
Weighted-
average
Stock Exercise
Options Price
------------- ----------
Outstanding, January 1, 1999 $ - $ -
Granted 82,500 10.00
Exercised - -
Forfeited - -
------------- -----------
Outstanding, September 30, 1999 $ 82,500 $ 10.00
============= ===========
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock- based Compensation," the Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations, in accounting for
stock-based awards to employees. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized in the Company's
financial statements. Had compensation expense included stock option plan costs
determined based on the fair value at the grant dates for options granted under
these plans consistent with Statement No. 123, pro forma net income and earnings
per share would not have been materially different than that presented on the
consolidated statements of income.
Note 4 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government agency
securities $ 5,794,706 $ - $ (200,911) $ 5,593,795
Corporate securities 3,537,025 2,178 (14,725) 3,524,478
Mortgage-backed securities 6,823,341 - (252,572) 6,570,769
------------- ------------ ------------- -------------
Total debt securities 16,155,072 2,178 (468,208) 15,689,042
Equity securities 455,000 - - 455,000
------------- ------------ ------------- -------------
Total $ 16,610,072 $ 2,178 $ (468,208) $ 16,144,042
============= ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Held to Maturity:
Mortgage-backed securities $ 1,710,672 $ - $ (58,336) $ 1,652,336
------------- ------------- ------------- -------------
Total $ 1,710,672 $ - $ (58,336) $ 1,652,336
============= ============= ============= =============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
At December 31,1998
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Available for Sale:
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>
Note 5 - LOANS
Loans receivable consists of the following:
September 30, December 31,
1999 1998
--------------- --------------
Real estate loans:
Residential $ 12,826,546 $ 1,653,004
Home equity 2,275,782 997,740
Construction 1,136,733 -
Commercial 5,333,254 858,000
Commercial 633,309 163,122
Consumer loans 1,698,449 860,406
-------------- -------------
23,904,073 4,532,272
Less:
Deferred loan costs (fees), net 2,402 (9,152)
Allowance for loan losses (157,764) (98,988)
------------- -------------
Total $ 23,748,711 $ 4,424,132
============== ===============
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
General
References in this discussion to "we", "us", and"our" refer to Nittany
Bank. In certain instances where appropriate, "we", "us", and "our" refer
collectively to Nittany Financial Corp. and Nittany Bank. References in this
discussion to "Nittany" refers to Nittany Financial Corp.
Nittany 's wholly owned subsidiary, Nittany Bank, commenced operations
as of October 26, 1998, and its activities have primarily consisted of offering
deposits, originating loans and servicing the deposits and loans acquired from
First Commonwealth Bank (the "Branch Acquisitions"). Prior to October 26, 1998,
our primary activities centered on the formation of Nittany Bank.
On May 24, 1999, Nittany Asset Management, Inc. (the "Asset Management Company")
was formed and incorporated as a Pennsylvania corporation. Asset Managment
Company is a wholly owned subsidiary of Nittany and was formed for the purpose
of offering alternative investment products and investment management services
to prospective customers. On August 3, 1999, $10,000 in capital was raised
through the issuance of common stock to Nittany, its sole shareholder. Asset
Management Company intends to begin service operations in the fourth quarter of
1999.
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, risks associated with the a de novo bank, the ability to
control costs and expenses, and general economic conditions. We undertake no
obligation to publicly release the results of any revisions to those forward
looking statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Asset/Liability Management
Our earnings are primarily dependent on our net interest income. Net
interest income is affected by (1) the amount of interest-earning assets and
interest-bearing liabilities, (2) rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities, and (3) the difference
("interest rate spread") between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities. To measure the
relationship of interest-earning assets and interest-bearing liabilities and
their impact on our net interest income, we maintain an asset/liability
management program.
One of the principal functions of our asset/liability management
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of this program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize the
fluctuations in the net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates. We evaluate various
interest rate analysis scenarios based upon various assumptions.
Interest rate sensitivity is the relationship of differences in the
amounts and repricing dates of interest-earning assets and interest-bearing
liabilities. These differences, or interest rate repricing "gap," provide an
indication to the extent to which net interest income could be affected by
changes in interest rates. During a period of rising interest rates, a positive
gap (when interest-earning assets are greater than interest-bearing liabilities)
is desirable. A falling interest rate environment would favor a negative gap
position (when interest-earning assets are less than interest-bearing
liabilities). However, not all assets and liabilities with similar maturities
and repricing opportunities will reprice at the same time or to the same degree.
As a result, our gap position is an indicator of our interest rate risk position
but does not necessarily predict the impact on our net interest income given a
change in interest rate levels.
11
<PAGE>
The following table sets forth our gap position for September 30, 1999,
based upon contractual repricing opportunities or maturities, with variable rate
products measured to the date of the next repricing opportunity as opposed to
contractual maturities.
<TABLE>
<CAPTION>
Less than
1 year 1-5 years Over 5 Years Total
------ --------- ------------ -----
Interest-earning assets: (Dollars In Thousands)
<S> <C> <C> <C> <C>
Loans receivable $ 3,374 $ 1,365 $ 19,166 $ 23,905
Investment securities 6,979 2,051 8,825 17,855
Interest bearing deposits with other banks 3,279 -- -- 3,279
-------- -------- -------- --------
Total interest-earning assets $ 13,632 $ 3,416 $ 27,991 $ 45,039
-------- -------- -------- --------
Interest-bearing liabilities
NOW accounts $ 4,819 $ -- $ -- $ 4,819
Money market accounts 14,036 -- -- 14,036
Savings accounts 1,451 -- -- 1,451
Certificates of deposit 5,953 3,869 565 10,387
FHLB advances 8,000 600 -- 8,600
-------- -------- -------- --------
Total interest-bearing liabilities $ 34,259 $ 4,469 $ 565 $ 39,293
-------- -------- -------- --------
Excess interest-earning
assets (liabilities) $(20,627) $ (1,053) $ 27,426
======== ======== ========
Cumulative interest-earning assets $ 13,632 $ 17,048 $ 45,039
Cumulative interest-bearing liabilities 34,259 38,728 39,293
-------- -------- --------
Cumulative gap $(20,627) $(21,680) $ 5,746
======== ======== ========
Cumulative interest rate
sensitivity ratio (1) (.40) (.44) 1.15
======== ======== ========
</TABLE>
- --------
(1) Cumulative interest-earning assets divided by cumulative interest-bearing
liabilities.
12
<PAGE>
Average balances are derived from daily averages calculated for the
nine months ended September 30, 1999.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999
---------------------------------------
Average Average
Balance Interest(1) Yield/Cost(4)
------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable.............................. $14,068 $ 816 7.73%
Investments securities........................ 16,436 729 5.91%
Interest-bearing deposits with other banks.... 2,760 80 3.91%
------ ------
Total interest-earning assets................... 33,264 1,625 6.52%
-----
Noninterest-earning assets...................... 1,859
Allowance for loan losses....................... (107)
-----
Total assets.................................... $35,016
=======
Interest-bearing liabilities:
Interest-bearing demand deposits.............. $ 2,975 44 1.96%
Money market deposits......................... 10,738 393 4.88%
Savings deposits.............................. 1,297 32 3.31%
Certificates of deposit....................... 6,560 255 5.19%
Advances from FHLB............................ 6,835 241 4.69%
------ -------
Total interest-bearing liabilities.............. $28,404 965 4.53%
------- -------
Noninterest-bearing liabilities
Demand deposits............................... $ 1,577
Other liabilities............................. 219
Stockholders' equity............................ 4,815
------
Total liabilities and stockholders' liability... $35,016
=======
Net interest income............................. $ 660
======
Interest rate spread (2)........................ 1.99%
Net yield on interest-earning assets(3)......... 2.65%
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 117.11%
</TABLE>
- ---------------
(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.
13
<PAGE>
Comparison of Financial Condition
We continued to experience strong growth during the nine-month period
ended September 30, 1999 with total assets increasing 88.0% to $46,602,000 from
$24,791,000 at December 31, 1998. This growth was stimulated primarily by an
increase in loans, net of allowance for loan losses, of $19,325,000, and was
funded through growth in various deposit products totaling $19,268,000 and
additional Advances from the Federal Home Loan Bank of $3,600,000.
At the period ended September 30, 1999, total cash and cash equivalents
totaled $3,619,000 as compared to $5,929,000 at December 31, 1998. Management
maintains a level of cash equivalents which is desirable for meeting the normal
cash flow requirements of its customers for the funding of loans and repayment
of deposits.
Investment securities increased $4,704,000 or 35.8% to $17,855,000 at
September 30, 1999 from $13,151,000 at December 31, 1998. The growth within the
investment portfolio was primarily structured toward mortgage-backed securities
with varying maturities between six and twenty-four years. Of the $4,678,000 in
mortgage-backed securities growth, management has classified $1,711,000 as held
to maturity securities.
Net loan receivables increased from $4,424,000 at December 31, 1998 to
$23,749,000 at September 30, 1999. Of this increase, approximately 93.2% or
$18,064,000 was comprised of loans secured by various forms of real estate. The
real estate lending growth included $11,174,000 in one-to-four family mortgages
and $4,475,000 in commercial real estate. Additionally, $2,415,000 was added
during the period in home equity and construction mortgages. Such increases
primarily reflected the economic health of our market area and the strategic,
service-oriented marketing approach taken by management to meet the lending
needs of the area. As of September 30, 1999, we had outstanding loan funding
commitments of approximately $2.9 million.
At September 30, 1999, our allowance for loan losses increased
approximately $59,000, to $158,000 from $99,000 at December 31, 1998, due to the
overall increase in the loan portfolio. Management continually evaluates the
adequacy of the allowance for loan losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses
of other financial institutions in our market area, the impact of economic
conditions on borrowers and other relevant factors that may come to the
attention of management. Although we maintain our allowance for loan losses at a
level that we consider to be adequate to provide for the inherent risk of loss
in our loan portfolio, there can be no assurance that future losses will not be
required in future periods.
Deposits increased $19,269,000 or 137.7% to $33,261,000 at September
30, 1999 compared to $13,992,000 at December 31, 1998. The growth was spread
among three primary sources: money market accounts of $8,626,000, time deposits
of $5,998,000 and demand deposits $4,462,000. Such growth resulted primarily
from the marketing efforts of promoting the opening of a new community bank in
the State College Area.
Advances from the Federal Home Loan Bank increased $3,600,000 to
$8,600,000 at September 30, 1999 compared to $5,000,000 at December 31, 1998.
Management applied approximately $3,000,000 of this increase in borrowed funds
to purchase investment securities. The positive spreads between the earnings on
investments purchased and the related expenses incurred on borrowed funds will
provide an additional source of income. Of the $8,600,000 of advances from the
Federal Home Loan Bank,
14
<PAGE>
approximately $8,000,000 is due to mature or reprice within the next year and
are comprised of LIBOR- based floating rate credit arrangements. During the
third quarter of 1999, $517,000 of the deposit growth was used to pay down
borrowed funds comprised almost exclusively of Federal Home Loan Bank advances.
At September 30, 1999, accumulated other comprehensive loss increased
$435,000, to a loss of $466,000 from a loss of $31,000 at December 31, 1998. The
increase in loss resulted from the fluctuation in market value of our investment
in available for sale securities. See Note 3 to the consolidated financial
statements. Because of interest rate volatility, accumulated other comprehensive
loss and stockholders' equity could materially fluctuate for each interim period
and year-end period. The decrease in market value of the investment securities
available for sale is considered temporary in nature and will not affect our net
income until the securities are sold. We plan to hold these securities until
maturity or until the market values of these securities increase. Accordingly,
we do not expect, though there is no assurance, that our investment in these
securities will affect net income in future periods.
Results of Operations
Net interest income for the three and nine months ended September 30,
1999 was $283,000 and $660,000, respectively. The interest rate spread for the
three and nine month periods ended September 30, 1999 was 2.07% and 1.99%,
respectively. Despite a slight increase in general interest rate levels during
the period, both interest income and expense were driven by increases in average
balances of interest-earning assets and interest-bearing liabilities. Of the
$22,966,000 and $23,545,000 increase in average interest-earning assets and
interest-bearing liabilities, respectively, during the three month period ended
September 30, 1999, $19,357,000 and $15,745,000, were primarily the result of
loan and deposit growth, respectively. In comparison, loan and deposit growth
during the nine month period ended September 30, 1999 of $12,392,000 and
$9,826,000, respectively, were the primary factors accounting for the
$14,446,000 and $15,829,000 increase in average interest-earnings assets and
interest-bearing liabilities, respectively. As noted previously, this growth is
a response to the overall economic health of our market area, and the strategic,
service-oriented marketing approach taken by management to meet the both the
lending and deposit needs of the area.
Non-interest income the three and nine month periods ending September
30, 1999 was $46,000 and $115,000, respectively. Non-interest income items are
primarily comprised of normal service charges and fees on deposits, along with
fee income derived from ATM surcharges. Such amounts have progressively
increased during each quarter of 1999 as the number of deposit accounts and
volume of related transactions have increased.
Non-interest expense for the three and nine month periods ending
September 30, 1999 was $359,000 and $959,000, respectively. Non-interest
expenses are comprised primarily of employee compensation and benefits,
occupancy and equipment, data processing, and other non-interest expenses. These
costs are the result of operating a larger organization, including the necessary
investments in skilled employees, facilities and technology; as well as
contracting the services of a third party processor for check and deposit
activity and transaction processing costs related to the two ATM's. Included in
other non-interest expense for the three and nine months ended September 30,
1999, is a non-recurring charge of $41,000. This charge relates to additional
expenses incurred in connection with our Branch Acquisitions.
15
<PAGE>
Liquidity and Capital Resources
Management monitors both Nittany's and Nittany Bank's Total risk-based,
Tier I risk-based and Tier I leverage capital ratios in order to assess
compliance with regulatory guidelines. At September 30, 1999, we exceeded our
minimum risk-based and leverage capital ratio requirements. Nittany and Nittany
Bank's Total risk-based, Tier I risk-based and Tier I leverage ratios were
12.9%, 12.4%, 8.7% at September 30, 1999.
Year 2000 Readiness
The year 2000 problem is associated with the inability of some computer
programs to distinguish between the year 1900 and the year 2000 because of
software programs that were written with a two digit year field instead of a
four digit field. If not correctly programmed or rewritten, some computer
applications could fail to operate or may create erroneous results when the year
changes to 2000 or other key dates in the first quarter of the year 2000. This
could cause entire system failures, miscalculations and disruptions of normal
business operations. As the banking industry is heavily dependent on computer
systems, the effect of this problem could be the temporary inability to process
transactions, generate statements and billings or engage in normal day to day
business activities. The extent of the potential impact of this problem is not
known and if not corrected in a timely manner, could affect the global economy.
Management and the Board of Directors has viewed the year 2000
initiative as a high priority of the Company and considers itself adequately
prepared for the date change. We continue to aggressively pursue appropriate
solutions and assurances with regard to compliance of all potentially affected
applications by the year 2000. The five phases of awareness, assessment,
renovation, validation and implementation have been completed by September 30,
1999.
Late in 1998, we organized a Y2K Readiness Committee comprised of
senior managers of the bank along with various key personnel in all departments.
Working through the various stages of Y2K compliance did not adversely affect
our business plan for 1999 or delay any planned technology projects.
It has not been necessary for us to hire any external consultants.
During the awareness phase, we provided the Board of Directors with
monthly updates and received input from our board members. The process of
gathering and sharing information included customers, employees and management.
The process was directed by an internal employee assigned the responsibility for
coordination in conjunction with a year 2000 team comprised of employees at all
levels of Nittany Bank. Brochures, mailings and statements stuffers were used to
keep customers abreast of the issues related to the year 2000. During the fourth
quarter, we will continue to work with customers to prepare and inform them of
the various risk issues associated with the date change.
The process of assessment was completed in the fourth quarter of 1998
and included the inventorying of all hardware and software and the
identification of all systems, vendors and other services which could be
affected by the date change. Our year 2000 committee then determined which items
were "mission critical" and ranked them with our highest priority. All outside
vendors and commercial loan customers were asked to provide written
documentation of their compliance and complete a survey prepared by the bank.
Additionally, testing of internal equipment and services, such as fax machines,
computers and security equipment was completed.
16
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The core processing system of Nittany Bank was determined to be the
most critical item that could affect us. A third party service bureau (the
"service bureau") provides Nittany Bank with all of the material data processing
that could be affected by this problem. The third party service bureau has
provided Nittany Bank with information and testing opportunities that management
deems to be adequate in supporting their claim of year 2000 readiness.
Additionally, the service bureau has provided us with a detailed contingency
plan for Nittany Bank, in case problems arise after the first day of January
2000. The core application software vendor, whose products are used by the
service bureau, has obtained ITAA*2000 certification, which indicates that the
software has the core capabilities needed to handle the Year 2000 challenge.
As a new operation opened during the awareness of the year 2000 issue,
Nittany Bank was cognizant of the issues as new equipment and vendors were
implemented. As such, the estimated costs associated with addressing the year
2000 issue were estimated not to exceed $10,000. To date, less than $5,000 has
been expended.
The validation phase included extensive testing of all hardware,
software and systems provided by third party vendors. As of September 30, 1999,
all "mission critical" core applications have been sufficiently upgraded and/or
replaced.
All commercial borrowers of Nittany Bank with aggregate balances
exceeding $100,000 have completed a risk assessment questionnaire and management
determined the risk associated with such borrowers to be low.
A Contingency and Business Resumption Plan was adopted by the Board of
Directors in August 1999. The most realistic risk posed to us is the possible
liquidity risk associated with large year-end customer withdrawals. We have
addressed the contingency plan for such risk and are prepared to meet expected
cash demands that may occur. Various agreements and sources of liquidity are in
place, if needed. However, year 2000 issues could affect our liquidity if
customer withdrawals in anticipation of the year 2000 are greater than expected.
Customer awareness continues to be a priority and we expect to provide
additional communication to our customers leading up to the year 2000 date
change.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with us, such as customers, vendors, payment system providers, utility
companies, and other financial institutions, makes it impossible to assure that
a failure to achieve compliance by one or more of these entities would not have
a material impact on our financial statements.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." ("Statement No. 133"). This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. Statement No. 133 supersedes the
disclosure requirements in Statements No. 80, 105 and 119. Statement of
Financial Accounting Standards No. 137 deferred the
17
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effective date of this statement to fiscal years beginning after June 15, 2000.
The adoption of Statement No. 133 is not expected to have a material impact on
the financial position or results of Nittany.
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("Statement No. 134"). This statement amends FASB Statement No. 65 "Accounting
for Certain Mortgage Banking Activities," to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. Statement No. 134 is effective January 1, 1999. The adoption of
this statement is not expected to have a material impact on the financial
position or results of operations of Nittany.
18
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in rights of the Company's security holders
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are incorporated herein by reference:
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**
10.1 Stock Option Plan
27 Financial Data Schedule (electronic data filing only)
-------------------
** Incorporated by reference to the identically numbered
exhibit to the registration statement Form SB-2 (File
No. 333-57277) declared effective by the SEC on July
31, 1998.
(b) Reports on Form 8-K
None
19
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and hereunto duly authorized.
NITTANY FINANCIAL CORP.
Date: November 10, 1999 By: /s/David Z. Richards
-------------------------------------
David Z. Richards
President and Chief Executive Officer
(Chief Accounting Officer)
EXHIBIT 10.1
<PAGE>
NITTANY FINANCIAL CORP.
1998 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the NITTANY
FINANCIAL CORP. ("Corporation") 1998 Stock Option Plan (the "Plan"). The purpose
of the Plan is to attract and retain qualified personnel for positions of
substantial responsibility and to provide additional incentive to officers,
directors, key employees and other persons providing services to the
Corporation, or any present or future parent or subsidiary of the Corporation to
promote the success of the business. The purpose of the Plan is also to reward
persons who organized the Corporation and its wholly-owned subsidiary bank. The
Plan is intended to provide for the grant of "Incentive Stock Options," within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and Non-Incentive Stock Options, options that do not so qualify. The
provisions of the Plan relating to Incentive Stock Options shall be interpreted
to conform to the requirements of Section 422 of the Code.
2. Definitions. The following words and phrases when used in this Plan
with an initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the masculine
pronoun shall include the feminine pronoun and the singular shall include the
plural.
(a) "Award" means the grant by the Committee of an Incentive
Stock Option or a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Board" shall mean the Board of Directors of the
Corporation, or any successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Corporation; (ii) the merger or
recapitalization of the Corporation whereby the Corporation is not the surviving
entity; (iii) a change in control of the Corporation, as otherwise defined or
determined by the Office of Thrift Supervision or regulations promulgated by it;
or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Corporation by any person, trust, entity or group. This
limitation shall not apply to the purchase of shares by underwriters in
connection with a public offering of Corporation stock, or the purchase of
shares of up to 25% of any class of securities of the Corporation by a
tax-qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or
as may hereafter be amended. The term "person" refers to an individual or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a Change
in Control has occurred shall be conclusive and binding.
<PAGE>
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option
Committee appointed by the Board in accordance with Section 5(a) of the Plan.
(f) "Common Stock" shall mean common stock of the Corporation,
or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of
employment with the Corporation or any present or future Parent or Subsidiary of
the Corporation. Employment shall not be considered interrupted in the case of
sick leave, military leave or any other leave of absence approved by the
Corporation or in the case of transfers between payroll locations, of the
Corporation or between the Corporation, its Parent, its Subsidiaries or a
successor.
(h) "Corporation" shall mean the NITTANY FINANCIAL CORP., the
parent corporation of the Savings Bank, or any successor or Parent thereof.
(i) "Director" shall mean a member of the Board of the
Corporation, or any successor or parent corporation thereto.
(j) "Director Emeritus" shall mean a person serving as a
director emeritus, advisory director, consulting director or other similar
position as may be appointed by the Board of Directors of the Savings Bank or
the Corporation from time to time.
(k) "Disability" means (a) with respect to Incentive Stock
Options, the "permanent and total disability" of the Employee as such term is
defined at Section 22(e)(3) of the Code; and (b) with respect to Non-Incentive
Stock Options, any physical or mental impairment which renders the Participant
incapable of continuing in the employment or service of the Savings Bank or the
Parent in his then current capacity as determined by the Committee.
(l) "Effective Date" shall mean the date specified in Section
15 hereof.
(m) "Employee" shall mean any person employed by the
Corporation or any present or future Parent or Subsidiary of the Corporation.
(n) "Fair Market Value" shall mean: (i) if the Common Stock is
traded otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the mean between the last bid and ask price of
such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a bid and
ask price. If no such bid and ask price is available, then the Fair Market Value
shall be determined by the Committee in good faith; or (ii) if the Common Stock
is listed
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on a national securities exchange, then the Fair Market Value per Share shall be
not less than the average of the highest and lowest selling price of such Common
Stock on such exchange on such date, or if there were no sales on said date,
then the Fair Market Value shall be not less than the mean between the last bid
and ask price on such date.
(o) "Incentive Stock Option" or "ISO" shall mean an option to
purchase Shares granted by the Committee pursuant to Section 8 hereof which is
subject to the limitations and restrictions of Section 8 hereof and is intended
to qualify as an incentive stock option under Section 422 of the Code.
(p) "Non-Incentive Stock Option" or "Non-ISO" shall mean an
option to purchase Shares granted pursuant to Section 9 hereof, which option is
not intended to qualify under Section 422 of the Code.
(q) "Option" shall mean an Incentive Stock Option or
Non-Incentive Stock Option granted pursuant to this Plan providing the holder of
such Option with the right to purchase Common Stock.
(r) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(s) "Optionee" shall mean any person who receives an Option or
Award pursuant to the Plan.
(t) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Sections 424(e) and (g) of
the Code.
(u) "Participant" means any Director, Director Emeritus,
officer or key employee of the Corporation or any Parent or Subsidiary of the
Corporation or any other person providing a service to the Corporation who is
selected by the Committee to receive an Award, or who by the express terms of
the Plan is granted an Award.
(v) "Plan" shall mean the NITTANY FINANCIAL CORP. 1998 Stock
Option Plan.
(w) "Savings Bank" shall mean Nittany Bank, or any successor
corporation thereto.
(x) "Share" shall mean one share of the Common Stock.
(y) "Subsidiary" shall mean any present or future corporation
which constitutes a "subsidiary corporation" as defined in Sections 424(f) and
(g) of the Code.
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<PAGE>
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 86,615 Shares.
Such Shares may either be from authorized but unissued shares, treasury shares
or shares purchased in the market for Plan purposes. If an Award shall expire,
become unexercisable, or be forfeited for any reason prior to its exercise, new
Awards may be granted under the Plan with respect to the number of Shares as to
which such expiration has occurred.
4. Six Month Holding Period.
Subject to vesting requirements, if applicable, except in the
event of death or disability of the Optionee, a minimum of six months must
elapse between the date of the grant of an Option and the date of the sale of
the Common Stock received through the exercise of such Option.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be
administered by the Board of Directors of the Corporation or a Committee which
shall consist of not less than two Directors of the Corporation appointed by the
Board and serving at the pleasure of the Board. All persons designated as
members of the Committee shall meet the requirements of a "Non- Employee
Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, as amended, as found at 17 CFR ss.240.16b-3.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Corporation and such other officers as
shall be designated by the Committee are hereby authorized to execute written
agreements evidencing Awards on behalf of the Corporation and to cause them to
be delivered to the Participants. Such agreements shall set forth the Option
exercise price, the number of shares of Common Stock subject to such Option, the
expiration date of such Options, and such other terms and restrictions
applicable to such Award as are determined in accordance with the Plan or the
actions of the Committee.
(c) Effect of Committee's Decision. All decisions,
determinations and
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<PAGE>
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
6. Eligibility for Awards and Limitations.
(a) The Committee shall from time to time determine the
officers, Directors, Directors Emeritus, key employees and other persons who
shall be granted Awards under the Plan, the number of Awards to be granted to
each such persons, and whether Awards granted to each such Participant under the
Plan shall be Incentive and/or Non-Incentive Stock Options. In selecting
Participants and in determining the number of Shares of Common Stock to be
granted to each such Participant, the Committee may consider the nature of the
prior and anticipated future services rendered by each such Participant, each
such Participant's current and potential contribution to the Corporation and
such other factors as the Committee may, in its sole discretion, deem relevant.
Participants who have been granted an Award may, if otherwise eligible, be
granted additional Awards.
(b) The aggregate Fair Market Value (determined as of the date
the Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by each Employee during any calendar
year (under all Incentive Stock Option plans, as defined in Section 422 of the
Code, of the Corporation or any present or future Parent or Subsidiary of the
Corporation) shall not exceed $100,000. Notwithstanding the prior provisions of
this Section 6, the Committee may grant Options in excess of the foregoing
limitations, provided said Options shall be clearly and specifically designated
as not being Incentive Stock Options.
7. Term of the Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless sooner terminated pursuant to
Section 18 hereof. No Option shall be granted under the Plan after ten (10)
years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each Incentive Stock
Option granted pursuant to the Plan shall comply with, and be subject to, the
following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive
Stock Option granted by the Committee under the Plan may be exercised shall not,
as to any particular Incentive Stock Option, be less than the Fair Market Value
of the Common Stock on the date that such Incentive Stock Option is granted.
(ii) In the case of an Employee who owns Common
Stock representing more than ten percent (10%) of the outstanding Common Stock
at the time the Incentive Stock
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<PAGE>
Option is granted, the Incentive Stock Option exercise price shall not be less
than one hundred and ten percent (110%) of the Fair Market Value of the Common
Stock on the date that the Incentive Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Incentive Stock Option granted under the Plan
shall be made at the time of exercise of each such Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at the Fair Market Value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment has been received by the Corporation, and no
Optionee shall have any of the rights of a stockholder of the Corporation until
Shares of Common Stock are issued to the Optionee.
(c) Term of Incentive Stock Option. The term of exercisability
of each Incentive Stock Option granted pursuant to the Plan shall be not more
than ten (10) years from the date each such Incentive Stock Option is granted,
provided that in the case of an Employee who owns stock representing more than
ten percent (10%) of the Common Stock outstanding at the time the Incentive
Stock Option is granted, the term of exercisability of the Incentive Stock
Option shall not exceed five (5) years.
(d) Exercise Generally. Except as otherwise provided in
Section 10 hereof, no Incentive Stock Option may be exercised unless the
Optionee shall have been in the employ of the Corporation at all times during
the period beginning with the date of grant of any such Incentive Stock Option
and ending on the date three (3) months prior to the date of exercise of any
such Incentive Stock Option. The Committee may impose additional conditions upon
the right of an Optionee to exercise any Incentive Stock Option granted
hereunder which are not inconsistent with the terms of the Plan or the
requirements for qualification as an Incentive Stock Option.
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Incentive Stock Option for at least six
months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Corporation written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Optioned Stock and to deliver enough of
the proceeds to the Corporation to pay the Option exercise price and any
applicable withholding taxes. If the Optionee does not sell the Optioned Stock
through a registered broker-dealer or equivalent third party, the Optionee can
give the Corporation written notice of the exercise of the Option and the third
party purchaser of the Optioned Stock shall pay the Option exercise price plus
any applicable withholding taxes to the Corporation.
(f) Transferability. An Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and
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<PAGE>
distribution.
9. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
Non-Incentive Stock Option granted pursuant to the Plan shall comply with and be
subject to the following terms and conditions.
(a) Options Granted to Directors. Non-Incentive Stock Options
to purchase shares of Common Stock may be granted to each Director who is not an
Employee on or after the Effective Date, at an exercise price equal to the Fair
Market Value of the Common Stock on such date of grant. The Options will be
first become exercisable as determined by the Committee or the Board of
Directors. Upon the death or Disability of the Director or Director Emeritus,
such Option shall be deemed immediately 100% exercisable. Such Options shall
continue to be exercisable for a period of ten years following the date of grant
without regard to the continued services of such Director as a Director or
Director Emeritus. In the event of the Optionee's death, such Options may be
exercised by the personal representative of his estate or person or persons to
whom his rights under such Option shall have passed by will or by the laws of
descent and distribution. Options may be granted to newly appointed or elected
non-employee Directors within the sole discretion of the Committee. The exercise
price per Share of such Options granted shall be equal to the Fair Market Value
of the Common Stock at the time such Options are granted. All outstanding Awards
shall become immediately exercisable in the event of a Change in Control of the
Savings Bank or the Company. Unless otherwise inapplicable, or inconsistent with
the provisions of this paragraph, the Options to be granted to Directors
hereunder shall be subject to all other provisions of this Plan.
(b) Option Price. The exercise price per Share of Common Stock
for each Non-Incentive Stock Option granted pursuant to the Plan shall be at
such price as the Committee may determine in its sole discretion, but in no
event less than the Fair Market Value of such Common Stock on the date of grant
as determined by the Committee in good faith.
(c) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Non-Incentive Stock Option granted under the
Plan shall be made at the time of exercise of each such Non-Incentive Stock
Option and shall be paid in cash (in United States Dollars), Common Stock or a
combination of cash and Common Stock. Common Stock utilized in full or partial
payment of the exercise price shall be valued at its Fair Market Value at the
date of exercise. The Company shall accept full or partial payment in Common
Stock only to the extent permitted by applicable law. No Shares of Common Stock
shall be issued until full payment has been received by the Company and no
Optionee shall have any of the rights of a stockholder of the Company until the
Shares of Common Stock are issued to the Optionee.
(d) Term. The term of exercisability of each Non-Incentive
Stock Option granted pursuant to the Plan shall be not more than ten (10) years
from the date each such Non-Incentive Stock Option is granted.
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<PAGE>
(e) Exercise Generally. The Committee may impose additional
conditions upon the right of any Participant to exercise any Non-Incentive Stock
Option granted hereunder which is not inconsistent with the terms of the Plan.
(f) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held a Non-Incentive Stock Option for at least
six months may engage in the "cashless exercise" of the Option. Upon a cashless
exercise, an Optionee gives the Company written notice of the exercise of the
Option together with an order to a registered broker-dealer or equivalent third
party, to sell part or all of the Optioned Stock and to deliver enough of the
proceeds to the Company to pay the Option exercise price and any applicable
withholding taxes. If the Optionee does not sell the Optioned Stock through a
registered broker-dealer or equivalent third party, the Optionee can give the
Company written notice of the exercise of the Option and the third party
purchaser of the Optioned Stock shall pay the Option exercise price plus any
applicable withholding taxes to the Company.
(g) Transferability. Any Non-Incentive Stock Option granted
pursuant to the Plan shall be exercised during an Optionee's lifetime only by
the Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on
Incentive Stock Options.
(a) Termination of Employment. In the event that any
Optionee's employment with the Company shall terminate for any reason, other
than Disability or death, all of any such Optionee's Incentive Stock Options,
and all of any such Optionee's rights to purchase or receive Shares of Common
Stock pursuant thereto, shall automatically terminate on (A) the earlier of (i)
or (ii): (i) the respective expiration dates of any such Incentive Stock
Options, or (ii) the expiration of not more than three (3) months after the date
of such termination of employment; or (B) at such later date as is determined by
the Committee at the time of the grant of such Award based upon the Optionee's
continuing status as a Director or Director Emeritus of the Savings Bank or the
Company, but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of such termination of
employment, and further that such Award shall thereafter be deemed a Non-
Incentive Stock Option. In the event that a Subsidiary ceases to be a Subsidiary
of the Company, the employment of all of its employees who are not immediately
thereafter employees of the Company shall be deemed to terminate upon the date
such Subsidiary so ceases to be a Subsidiary of the Company.
(b) Disability. In the event that any Optionee's employment
with the Company shall terminate as the result of the Disability of such
Optionee, such Optionee may exercise any Incentive Stock Options granted to the
Optionee pursuant to the Plan at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of such termination of employment, but only
if, and to the
- 8 -
<PAGE>
extent that, the Optionee was entitled to exercise any such Incentive Stock
Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any
Incentive Stock Options granted to such Optionee may be exercised by the person
or persons to whom the Optionee's rights under any such Incentive Stock Options
pass by will or by the laws of descent and distribution (including the
Optionee's estate during the period of administration) at any time prior to the
earlier of (i) the respective expiration dates of any such Incentive Stock
Options or (ii) the date which is two (2) years after the date of death of such
Optionee but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of death. For purposes of
this Section 10(c), any Incentive Stock Option held by an Optionee shall be
considered exercisable at the date of his death if the only unsatisfied
condition precedent to the exercisability of such Incentive Stock Option at the
date of death is the passage of a specified period of time. At the discretion of
the Committee, upon exercise of such Options the Optionee may receive Shares or
cash or a combination thereof. If cash shall be paid in lieu of Shares, such
cash shall be equal to the difference between the Fair Market Value of such
Shares and the exercise price of such Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes
of Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment without regard to the Disability or death
of the Participant.
(e) Termination of Incentive Stock Options. Except as may be
specified by the Committee at the time of grant of an Option, to the extent that
any Incentive Stock Option granted under the Plan to any Optionee whose
employment with the Company terminates shall not have been exercised within the
applicable period set forth in this Section 10, any such Incentive Stock Option,
and all rights to purchase or receive Shares of Common Stock pursuant thereto,
as the case may be, shall terminate on the last day of the applicable period.
11. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment or
service, Disability of an Optionee or his death shall be such terms and
conditions as the Committee shall, in its sole discretion, determine at the time
of termination of service, unless specifically provided for by the terms of the
Agreement at the time of grant of the award.
12. Withholding Tax. The Company shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options any
taxes required by law to be withheld with respect to such cash payments. Where a
Participant or other person is entitled to receive Shares pursuant to the
exercise of an Option, the Company shall have the right to require the
Participant or such other person to pay the Company the amount of any taxes
which the
- 9 -
<PAGE>
Company is required to withhold with respect to such Shares, or, in lieu
thereof, to retain, or to sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
13. Recapitalization, Merger, Consolidation, Change in Control and
Other Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Company, within the sole discretion of the Committee, the
aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a Change in Control of the Company, as
determined by the Committee. In the event of such a Change in Control, the
Committee and the Board of Directors will take one or more of the following
actions to be effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the acquiring or
succeeding corporation (or an affiliate thereof), provided that: (A) any such
Substitute Options exchanged for Incentive Stock Options shall meet the
requirements of Section 424(a) of the Code, and (B) the shares of stock issuable
upon the exercise of such Substitute Options shall constitute securities
registered in accordance with the Securities Act of 1933, as amended, ("1933
Act") or such securities shall be exempt from such registration in accordance
with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively, "Registered
Securities"), or in the alternative, if the securities issuable upon the
exercise of such Substitute Options shall not constitute Registered Securities,
then the Optionee will receive upon consummation of the Change in Control
transaction a cash payment for each Option surrendered equal to the difference
between (1) the Fair Market Value of the consideration to be received for each
share of Common Stock in the Change in Control transaction times the number of
shares of Common Stock subject to such surrendered Options, and (2) the
aggregate exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which
the holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment (the "Merger Price") for each share of Common Stock
exchanged in the Change in Control transaction, to make or to provide for a cash
payment to the Optionees equal to the difference between (A) the
- 10 -
<PAGE>
Merger Price times the number of shares of Common Stock subject to such Options
held by each Optionee (to the extent then exercisable at prices not in excess of
the Merger Price) and (B) the aggregate exercise price of all such surrendered
Options in exchange for such surrendered Options.
(c) Extraordinary Corporate Action. Notwithstanding any
provisions of the Plan to the contrary, subject to any required action by the
stockholders of the Company, in the event of any Change in Control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the Option exercise price per Share of
Common Stock, and the consideration to be given or received by the Company upon
the exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Optionee in connection
therewith; and/or
(iii) make such other adjustments in connection with
the Plan as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable; provided, however, that no action shall be taken by
the Committee which would cause Incentive Stock Options granted pursuant to the
Plan to fail to meet the requirements of Section 422 of the Code without the
consent of the Optionee.
(d) Acceleration. The Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan.
Except as expressly provided in Sections 13(a) and 13(b), no Optionee
shall have any rights by reason of the occurrence of any of the events described
in this Section 13.
14. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the grant of an Option shall be
given to each individual to whom an Option is so granted within a reasonable
time after the date of such grant in a form determined by the Committee.
15. Effective Date. The Plan shall become effective upon the date of
approval of the Plan by the stockholders of the Corporation. The Committee may
make a determination related to Awards prior to the Effective Date with such
Awards to be effective upon the date of stockholder approval of the Plan.
16. Approval by Stockholders. The Plan shall be approved by
stockholders of the
- 11 -
<PAGE>
Company within twelve (12) months before or after the date the Plan is approved
by the Board.
17. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on the Optionee by the grant of a
new Option at such time, or shall not materially decrease the Optionee's
benefits under the Option without the consent of the holder of the Option,
except as otherwise permitted under Section 18 hereof.
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or
discontinue the Plan, except that no action of the Board may increase (other
than as provided in Section 13 hereof) the maximum number of Shares permitted to
be optioned under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Company.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Option unlawful or subject the Company to any penalty,
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
19. Conditions Upon Issuance of Shares; Limitations on Option Exercise;
Cancellation of Option Rights.
(a) Shares shall not be issued with respect to any Option
granted under the Plan unless the issuance and delivery of such Shares shall
comply with all relevant provisions of applicable law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities laws and the
requirements of any stock exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares issuable hereunder shall relieve the Company of
any liability with respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company
may require the person exercising the Option to make such representations and
warranties as may be necessary to
- 12 -
<PAGE>
assure the availability of an exemption from the registration requirements of
federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company or its
Subsidiaries for "cause" as defined at 12 C.F.R. 563.39(b)(1) as determined by
the Board of Directors, all Options held by such Participant shall cease to be
exercisable as of the date of such termination of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the
Optionee's personal representative), the Committee, in its sole and absolute
discretion, may make a cash payment to the Optionee, in whole or in part, in
lieu of the delivery of shares of Common Stock. Such cash payment to be paid in
lieu of delivery of Common Stock shall be equal to the difference between the
Fair Market Value of the Common Stock on the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended,
and regulations promulgated thereunder.
20. Reservation of Shares. During the term of the Plan, the Company
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
22. No Employment Rights. No Director, Employee or other person shall
have a right to be selected as a Participant under the Plan. Neither the Plan
nor any action taken by the Committee in administration of the Plan shall be
construed as giving any person any rights of employment or retention as an
Employee, Director or in any other capacity with the Company, the Savings Bank
or other Subsidiaries.
23. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, except to the
extent that federal law shall be deemed to apply.
- 13 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<INVESTMENTS-MARKET> 1,652
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<ALLOWANCE> 158
<TOTAL-ASSETS> 46,602
<DEPOSITS> 33,261
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0
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