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 March 31, 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 incorporation (IRS Employer Identification No.)
or organization)
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 May 10, 1999: 577,436
<PAGE>
NITTANY FINANCIAL CORP.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Page
Number
-------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
March 31, 1999 and December 31, 1998
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended March 31, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Default Upon Senior Securities 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8 - K 13
SIGNATURES 14
</TABLE>
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 209,003 $ 307,443
Interest-bearing deposits with other banks 2,508,895 5,621,800
Investment securities available for sale 14,988,691 13,150,768
Investment securities held to maturity (market
value of $1,944,765) 1,945,069 -
Loans receivable (net of allowance for loan losses
of $98,678 and $98,988 ) 10,378,885 4,424,132
Premises and equipment 168,562 126,160
Intangible assets 928,196 941,886
Accrued interest and other assets 229,397 218,394
------------ ------------
TOTAL ASSETS $ 31,356,698 $ 24,790,583
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 1,430,402 $ 777,400
Interest-bearing demand 2,929,530 2,146,171
Money market 9,903,036 5,409,434
Savings 1,327,266 1,269,834
Time 4,984,392 4,389,545
------------ ------------
Total deposits 20,574,626 13,992,384
FHLB advances 5,600,000 5,000,000
Accrued interest payable and other liabilities 120,631 144,546
Commitment to purchase investment security - 500,000
------------ ------------
TOTAL LIABILITIES 26,295,257 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 (609,150) (525,650)
Accumulated other comprehensive income (39,298) (30,586)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,061,441 5,153,653
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 31,356,698 $ 24,790,583
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,
1999 1998
------------- -------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 150,345 $ -
Interest-bearing deposits with other banks 42,407 464
Investment securities 204,732 -
------------- -------------
Total interest and dividend income 397,484 464
------------- -------------
INTEREST EXPENSE
Deposits 179,845 -
FHLB advances 50,057 -
------------- -------------
Total interest expense 229,902 -
------------- -------------
NET INTEREST INCOME 167,582 464
Provision for loan losses - -
------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 167,582 464
------------- -------------
NONINTEREST INCOME
Service fees on deposit accounts 27,251 -
Other income 3,472 -
------------- -------------
Total noninterest income 30,723 -
------------- -------------
NONINTEREST EXPENSE
Compensation and employee benefits 109,924 20,827
Occupancy and equipment 49,180 439
Data processing 15,778 -
Goodwill amortization 13,690 -
Professional fees 24,757 2,238
Printing and supplies 16,908 -
Other 51,568 1,013
------------- -------------
Total noninterest expense 281,805 24,517
------------- -------------
Loss before income taxes (83,500) (24,053)
Income taxes - -
------------- -------------
NET LOSS $ (83,500) $ (24,053)
============= =============
LOSS PER SHARE $ ($0.14) $ ($1.75)(1)
WEIGHTED AVERAGE SHARES OUTSTANDING 577,436 13,770
- -----------------------------
(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 in the private offering with the organizers.
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Compre- Total Compre-
Common Paid-in Retained hensive Stockholders' hensive
Stock Capital Earnings Income Equity Income
----------- ------------- ------------- ------------ ------------- -----------
<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 (83,500) (83,500) (83,500)
Other comprehensive income:
Unrealized loss on available for
sale securities (8,712) (8,712) (8,712)
-----------
Comprehensive loss $ (92,212)
--------- ------------ ----------- ----------- ------------- ===========
Balance, March 31, 1999 $ 57,744 $ 5,652,145 $ (609,150) $ (39,298) $ 5,061,441
========= ============ =========== =========== =============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (83,500) $ (24,053)
Adjustments to reconcile net loss to
net cash used for operating activities:
Provision for loan losses - -
Depreciation, amortization, and accretion,net 30,689 -
Increase in accrued interest receivable (31,376) -
Increase in accrued interest payable 7,893 -
Other, net (11,435) (5,046)
------------- -------------
Net cash used for operating activities (87,729) (29,099)
------------- -------------
INVESTING ACTIVITIES
Purchase of one year certificate of deposit - (10,548)
Commitment to purchase AFS investment security (500,000) -
Investment securities available for sale:
Purchases (3,523,012) -
Maturities and repayments 1,665,249 -
Investment securities held to maturity:
Purchases (1,945,065) -
Net increase in loans receivable (5,951,471) -
Purchase of premises and equipment (51,559) (2,649)
------------- -------------
Net cash used for investing activities (10,305,858) (13,197)
------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 6,582,242 -
Proceeds from FHLB advances 600,000 -
Net proceeds from the sale of common stock - 148,747
------------- -------------
Net cash provided by financing activities 7,182,242 148,747
------------- -------------
Increase (decrease) in cash and cash equivalents (3,211,345) 106,451
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 5,929,243 29,449
------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,717,898 $ 135,900
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest on deposits and borrowings $ 222,009 $ -
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<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 subsidiary Nittany Bank (the "Bank"). 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 which 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 interim periods are not necessarily indicative of the
results to be expected for the full year or any other interim period.
7
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets at March 31, 1999 increased $6,566,000 or 26.5% from $24,791,000 at
December 31, 1998 to $31,357,000 at March 31, 1999 due to a strong growth in
loans within the Company's market area of approximately $6.0 million. This
growth was primarily funded by an increase in deposits of approximately $6.6
million.
Interest-bearing deposits with other banks decreased $3,113,000 or 55.4% from
$5,622,000 at December 31, 1998 to $2,509,000 at March 31, 1999. Management
began to utilize excess overnight deposits and short-term certificates of
deposit to fund loan demand and to increase its holdings in higher yielding
investment securities.
Total investment securities increased $3,783,000 or 28.8% from $13,151,000 at
December 31, 1998 to $16,934,000 at March 31, 1999. The Company increased its
investments by purchasing $2,878,000 of longer-term mortgage-backed securities
with yields ranging from 5.0% to 7.0%, and $1,592,000 of 5 and 8 year U.S.
Government Agency securities with yields ranging from 5.6% to 6.5%. During 1998,
management focused on supplementing loan demand by primarily investing in U.S.
Government Agency securities; however, during the first quarter of 1999, the
emphasis has been directed toward increasing the mortgage-backed securities
portfolio from 27.4% to 37.1% of the total investment portfolio. As a result of
this increase, the Company has classified $1,945,000 as held to maturity
Net loans receivable increased $5,955,000 or 134.6% from $4,424,000 at December
31, 1998 to $10,379,000 at March 31, 1999. The net increase was primarily
attributable to increases in one-to-four family mortgages of $4,478,000 and
nonresidential mortgages of $1,031,000. Such increases primarily reflected the
economic health of the Bank's market area, the competitive pricing of the Bank's
loan product, and the strategic approach taken by management to meet projected
growth. Funding was mainly provided by an increase in deposits of $6,582,000,
the usage of interest-bearing deposits with other institutions of $3,113,000,
and an increase in FHLB borrowings of $600,000. As of March 31, 1999, the
Company has outstanding commitments of $1.9 million.
8
<PAGE>
Deposits increased $6,582,000 or 47.0% to $20,575,000 at March 31, 1999 from
$13,992,000 at December 31, 1998 due primarily to an increase in volume of money
market and transaction accounts of $4,494,000 and $1,436,000, respectively.
During the first quarter of 1999 management began a marketing campaign aimed at
promoting the Bank's services, in general, and the favorable rates being offered
on its tiered money market accounts, in specific. Within this product mix, the
most significant growth occurred at the two highest tiers, which require a
minimum balance of $50,000 at rates of 4.75% and 5.00%. This increase accounted
for approximately $2.9 million of the overall fluctuation. Other increases
resulted from the Company offering a 25 basis point decrease on a loan for any
customer involved in the automatic transfer of payment program from a Nittany
Bank account.
As noted above, the Company obtained funding through an additional fixed rate
advance from the FHLB of $600,000. This represents a 12.0% increase of
borrowings to $5,600,000 at March 31, 1999 from $5,000,000 at December 31, 1998
in order to support business development. FHLB borrowings have staggering
maturities, which range from two to five years.
PLAN OF OPERATIONS
The Company's wholly owned subsidiary, Nittany Bank (the "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. Prior to October 26, the Company's
primary activities centered on the formation of the Bank.
Net interest income for the three months ended March 31, 1999 was $168,000. As
regional interest rates have remained relatively unchanged during the first
three months of 1999, both interest income and expense are driven by
fluctuations in average principal balances. Interest earning assets, which rose
$9.0 million during 1999, were fueled by increases in investment securities of
$7.3 million and loans of $6.1 million, while offset somewhat by a decrease in
interest-bearing deposits with other banks of $6.7 million. Interest-bearing
liabilities increased $8.7 million during 1999 as increases in money market
accounts of $4.4 million and FHLB advances of $4.3 million occurred. The
resultant fluctuations in average principal balances have been previously
discussed.
9
<PAGE>
Noninterest expense, which is comprised of compensation and employee benefits,
occupancy and equipment, data processing, goodwill amortization, professional
fees, printing and supplies, and other expense, was $282,000 for the three
months ended March 31, 1999. Compensation and employee benefits expense of
$110,000 represents the necessary compensation and benefits associated with the
employment of the equivalent of 14 full time employees. Occupancy and equipment
expense of $49,000 consists primarily of rental payments for both branch offices
and the related maintenance, utilities, and depreciation of leasehold
improvements. Data processing expense of $16,000 is primarily related to fees
associated with the Company's third party service bureau. Goodwill amortization
of $14,000 is related to the amortization of goodwill over a 20-year period from
the branch office acquisitions with First Commonwealth Bank. Professional fees
of $25,000 stem from outside assistance in complying with the increased levels
of regulatory compliance of a public reporting company. Stationary, printing,
supplies, and postage of $17,000 and other expense of $52,000 consist of various
smaller dollar items that are continually incurred in performing the daily
operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments, and interest-bearing time
deposits with other banks and funds provided from borrowings. While scheduled
repayments of loans and mortgage-backed securities and maturities of investment
securities are predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates, economic
conditions, and competition. We use our liquid resources principally to fund
loan commitments, maturing certificates of deposit and demand deposit
withdrawals, to invest in other interest-earning assets, and to meet operating
expenses.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry and similar matters. Management monitors projected liquidity
needs and determines the level desirable based in part on the Bank's commitments
to make loans and management's assessment of the Bank's ability to generate
funds.
Management monitors both the Company's and the Bank's Total risk-based, Tier I
risk-based and Tier I leverage capital ratios in order to assess compliance with
regulatory guidelines. At March 31, 1999, both the Company and the Bank exceeded
the minimum risk-based and leverage capital ratios requirements. The Company's
and Bank's Total risk-based, Tier I risk-based and Tier I leverage ratios are
22.6%, 22.1%, 13.7% and 21.4%, 20.9%, 12.9%, respectively at March 31, 1999.
10
<PAGE>
RISK ELEMENT
As of March 31, 1999, the Company did not have any nonperforming assets, which
would include impaired loans. Management monitors its loan portfolio for
impaired loans on a continual basis.
Although there was significant growth in the loan portfolio during the
three-month period ended March 31, 1999, nonperforming loans continue to be
nonexistent. On a percentage basis, the allowance for loan losses to loans
outstanding declined from 2.18% as of December 31, 1998 to .94% as of March 31,
1999. Approximately 75% of the total loan portfolio to date is comprised of 1-4
family and commercial real estate loans, with the consumer real estate mortgage
loans comprising over 57% of the portfolio. These loan types have historically ,
by industry standards, incurred significantly less losses in relationship to
actual principal disbursed.
Management believes the level of the allowance for loan losses at March 31, 1999
is sufficient; however, there can be no assurance that the current allowance for
loan losses will be adequate to absorb all future loan losses. The relationship
between the allowance for loan losses and outstanding loans is a function of the
credit quality and known risk attributed to the loan portfolio. The on-going
loan review program and credit approval process is used to determine the
adequacy of the allowance for loan losses.
YEAR 2000
A great deal of information has been disseminated about the global computer year
2000. Many computer programs can only distinguish the final two digits of the
year entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency and other data. 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.
11
<PAGE>
YEAR 2000 (Continued)
However, if the service bureau is unable to resolve all facets of this 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 is in the
process of developing and testing a plan, which it intends to be completed
during the second quarter 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. The Bank will continue monitoring their service bureau to evaluate
whether its data processing system will fail and is being provided with periodic
updates on the status of testing and upgrades being made by the service bureau.
If the Bank service bureau fails, the Bank will revert to a fully manual system
with customer ledger cards. Such a contingency alternative was determined as the
most viable of the Bank's options in the event of a "worst case" Year 2000
compliance disaster. The Bank's contingency options are documented in a written
plan. If this labor-intensive approach is necessary, management and employees
will become much less efficient. However, the Bank believes that they would be
able to operate in this manner in the short-term, until their existing service
bureau, or their replacement, is able to again provide data processing services.
If very few financial institution services bureaus were operating in the year
2000, the Bank's replacement costs, assuming the Bank could negotiate an
agreement, could be material.
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.
12
<PAGE>
Nittany Financial Corp.
FORM 10-QSB
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. Results of votes 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**
27 Financial Data Schedule, (electronic 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) None
<PAGE>
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 thereunto duly authorized.
Nittany Financial Corp.
(Registrant)
Date: By: /s/ David Z. Richards
-----------------------------------------
May 14, 1999 David Z. Richards
President, Chief Executive Officer, and
Principal Financial Officer
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 209
<INT-BEARING-DEPOSITS> 2,509
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,989
<INVESTMENTS-CARRYING> 1,945
<INVESTMENTS-MARKET> 1,945
<LOANS> 10,379
<ALLOWANCE> 99
<TOTAL-ASSETS> 31,357
<DEPOSITS> 20,575
<SHORT-TERM> 0
<LIABILITIES-OTHER> 121
<LONG-TERM> 5,600
0
0
<COMMON> 58
<OTHER-SE> 5,003
<TOTAL-LIABILITIES-AND-EQUITY> 31,357
<INTEREST-LOAN> 150
<INTEREST-INVEST> 205
<INTEREST-OTHER> 42
<INTEREST-TOTAL> 397
<INTEREST-DEPOSIT> 180
<INTEREST-EXPENSE> 230
<INTEREST-INCOME-NET> 168
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 282
<INCOME-PRETAX> (84)
<INCOME-PRE-EXTRAORDINARY> (84)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.07
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 99
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 99
<ALLOWANCE-DOMESTIC> 99
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
