SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
-----------------
OR
[X] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
------------ ------------
Commission File No. 333-57277
Nittany Financial Corp.
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 23-2925762
- --------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
116 East College Avenue, State College, Pennsylvania 16801
- ---------------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (814) 234-7320
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Securities registered under to Section 12(b) of the Exchange Act: None
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Securities registered under to Section 12(g) of the Exchange Act: None
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Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $2,618,000.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant, based on the average bid and asked
price of the Registrant's Common Stock on March 1, 2000 was $4.7 million.
As of March 1, 2000, there were issued and outstanding 699,004 shares
of the Registrant's Common Stock.
Transition Small Business Disclosure Format (check one): YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE. None
<PAGE>
PART I
Certain statements contained herein are forward-looking and may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." These forward-looking
statements are based on the current expectations of the Company (as defined
below), and the Company notes that a variety of factors could cause its actual
results and experience to differ materially from the anticipated results or
other expectations expressed in such forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development, and
results of the Company's business include interest rate movements, competition
from both financial and non-financial institutions, changes in applicable laws
and regulations and interpretations thereof, the timing and occurrence (or
non-occurrence) of transactions and events that may be subject to circumstances
beyond the Company's control, and general economic conditions. The Company does
not undertake to update any forward-looking statement, whether written or oral,
that may be made from time to time by or on the Company's behalf.
Item 1 - Business
- -----------------
Nittany Financial Corp. ("Nittany") is a holding company organized in
1997 for the purpose of establishing a de novo community bank in State College,
Pennsylvania. Nittany Bank commenced operations as a wholly-owned FDIC-insured
federal savings bank subsidiary of Nittany on October 26, 1998. At December 31,
1999, the business operations of Nittany included two operating subsidiaries
(collectively defined as the "Company"), as follows:
o Nittany Bank (or the"Bank") commenced banking operations in
October 1998 as a federally-insured federal savings bank with two
offices at 116 East College Avenue and 1276 North Atherton, State
College, Pennsylvania.
o Nittany Asset Management, Inc. ("Nittany Asset Management") was
formed in May 1999 primarily to offer various types of investment
products and services. This subsidiary is headquartered at 1276
North Atherton, State College, Pennsylvania and began operations
in November 1999.
On December 10, 1999, Nittany commenced an additional common stock
offering to sell up to 230,000 shares of its common stock at $11.00 per share.
The offering is not underwritten and is not subject to the sale of any minimum
number or dollar amount of shares. The offering will terminate no later than
March 31, 2000. At December 31, 1999, Nittany sold and issued 79,040 shares
increasing the Company's outstanding common shares to 656,476 shares. The
aggregate net proceeds from the offering were $820,235, of which $800,000 was
contributed as capital to Nittany Bank. See "Item 5 -- Market for Common Equity
and Related Stockholder Matters."
The Company's core business activities primarily consists of
residential real estate lending, consumer lending, commercial lending, and
retail deposits. At December 31,1999, the Company had assets of $50.0 million,
loans receivable of $28.2 million, deposits of $35.6 million, and stockholders'
equity of $5.2 million. Nittany Asset Management was not a material component of
the Company for the year ended December 31, 1999.
1
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Competition
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition is in the
Company's market area of Centre County (which includes the borough of State
College and the surrounding townships of College, Ferguson, Halfmoon, Harris and
Patton) which is a highly competitive market for financial services. The Company
faces direct competition from a significant number of financial institutions
operating in its market area, many with a state-wide or regional presence and in
some cases a national presence. Many of these financial institutions have been
in business for many years, have established customer bases, are significantly
larger and have greater financial resources than the Company has and are able to
offer certain services that the Company currently is not able to offer. In
particular, Centre County, is served almost entirely by large, regional
financial institutions, almost all of which are headquartered out of the area.
These financial institutions include Mellon Bank, NA (Pittsburgh, PA), Sovereign
Bank (formerly Core States, Reading, PA), Northwest Savings Bank (Warren, PA),
PNC Bank (Pittsburgh, PA), First Commonwealth Bank (Indiana, PA), Omega Bank
(State College, PA), Keystone Financial Bank (Harrisburg, PA) and Reliance Bank
(Altoona, PA). The area also includes Corning Employees Credit Union, Penn State
Federal Credit Union, SPE Federal Credit Union and State College Federal Credit
Union. Nittany Bank is the only FDIC-insured financial institution headquartered
and operated in State College. The Company also competes for deposits and loans
from non-bank institutions such as brokerage firms, credit unions, insurance
companies, money market mutual funds and private lenders.
Lending Activities
Analysis of Loan Portfolio. Set forth below is selected data relating
to the composition of the Company's portfolio by type of loan and in percentage
of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
At At
December 31, 1999 December 31, 1998
------------------------------ ----------------------------------
Amount Percent Amount Percent
----------------- ------------ ----------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
- --------------
Real Estate Loans:
One- to- four family................... $15,490 54.98% $1,653 36.47%
Commercial ............................ 6,504 23.09 858 18.93
Home equity............................ 2,377 8.44 998 22.02
Construction........................... 747 2.65 -- --
Commercial............................... 1,638 5.81 163 3.60
Consumer ................................ 1,417 5.03 860 18.98
------- ------ ------ ------
Total............................... 28,173 100.00% 4,532 100.00%
====== ======
Less:
Deferred loan (costs) fees, net.......... 7 9
Allowance for possible loan losses....... 187 99
------- ------
Total loans, net.................... $27,979 $4,424
======= ======
</TABLE>
2
<PAGE>
Loan Maturity Tables
The following table sets forth by scheduled repricing dates or the
contractual maturity dates the Company's loan portfolio at December 31, 1999.
The table does not include prepayments or scheduled principal repayments.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
Real Estate Loans:
One- to- four family...... $ 78 $1,434 $13,978 $15,490
Commercial................ -- 4,594 1,910 6,504
Construction.............. 747 -- -- 747
Home equity............... 810 318 1,249 2,377
Commercial.................. 663 849 126 1,638
Consumer ................... 574 633 210 1,417
----- ----- ------ ------
Total amount due $2,872 $7,828 $17,473 $28,173
===== ===== ====== ======
The following table sets forth dollar amount of all loans at December
31, 1999, due after December 31, 2000, which have fixed interest rates and
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
------------------- ----------------- ----------
(In thousands)
One- to- four family....... $ 6,042 $ 9,370 $15,412
Commercial real estate..... 1,511 4,993 6,504
Home equity................ 1,567 -- 1,567
Commercial................. 532 443 975
Consumer................... 843 -- 843
------ ------ ------
Total............. $10,495 $14,806 $25,301
====== ====== ======
One- to- Four Family Lending. The Company's one- to- four family
residential mortgage loans are secured by property located in its market area.
The Company generally originate one- to- four family residential mortgage loans
in amounts up to 90% of the lesser of the appraised value or selling price of
the mortgaged property without requiring mortgage insurance. Additionally, the
Company generally originates and retains fixed rate and adjustable rate loans
for retention in its portfolio. Currently, the Company's one- to- four family
loan portfolio consists of adjustable rate loans with fixed rate periods of up
to 7 years (three years for non-owner occupied), with principal and interest
calculated using a maximum 30 year (owner occupied) or 25 year (non-owner
occupied) amortization period. After the initial fixed rate period is completed,
such loans reprice every year.
All of the one- to- four family mortgages include "due on sale"
clauses, which are provisions that give the Company the right to declare a loan
immediately payable if the borrower sells or otherwise transfers an interest in
the property to a third party.
Property appraisals on real estate securing the Company's one- to- four
family residential loans are made by state certified and licensed independent
appraisers approved by the Board of Directors.
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Appraisals are performed in accordance with applicable regulations and policies.
At the Company's discretion, title insurance is either obtained or an attorney's
certificates of title is obtained on all first mortgage real estate loans
originated. In some instances, a fee is charged equaled to a percentage of the
loan amount (commonly referred to as points).
Construction Loans. The Company originates loans to finance the
construction of one- to- four family dwellings. Generally, construction loans to
individuals are made only if the Company also makes the mortgage loan on the
property. Construction loans to individuals are underwritten similar to those
for residential mortgage loans. The Company makes construction loans to builders
on a limited basis. Construction loans to builders generally have terms of up to
one year and interest rates which are slightly higher than normal residential
mortgage loans. These loans generally are adjustable rate loans.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction and development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Company may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Real Estate Loans. Commercial real estate loans are loans
secured by commercial real estate (e.g., shopping centers, medical buildings,
retail offices) in the Company's market area. Commercial real estate loans are
generally originated in amounts up to 80% of the appraised value of the property
and are secured by improved property such as office buildings, retail stores,
warehouse, church buildings and other non-residential buildings, most of which
are located in the Company's market area. Commercial real estate loans are
generally made at rates which adjust above the treasury interest rate or are
balloon loans with fixed interest rates which generally mature in three to five
years with principal amortization for a period of up to 25 years.
Loans secured by commercial real estate are generally larger and
involve a greater degree of risk than one- to- four family residential mortgage
loans. Of primary concern, is the borrower's creditworthiness and the
feasibility and cash flow potential of the project. Loans secured by income
properties are generally larger and involve greater risks than residential
mortgage loans because payments on loans secured by income properties are often
dependent on successful operation or management of the properties. As a result,
repayment of such loans may be subject to a greater extent than residential real
estate loans to adverse conditions in the real estate market or the economy.
Commercial Business Loans. Commercial business loans are underwritten
on the basis of the borrower's ability to service such debt from income.
Commercial business loans are generally made to small and mid-sized companies
located within the Company's primary lending area. In most cases, additional
collateral of equipment, accounts receivable, inventory, chattel or other assets
is required before the Company makes a commercial business loan.
Consumer. The Company's consumer loan portfolio includes various types
of secured and unsecured consumer loans including home equity lines of credit
and automobile loans (new and used). Consumer loans generally have terms of one
year to ten years, some of which are at fixed rates and some of which have rates
that adjust periodically.
4
<PAGE>
Consumer loans are advantageous to the Company because such loans
generally have higher rates of interest and shorter terms, but they also involve
more credit risk than residential mortgage loans because of the higher potential
of defaults and the difficulties involved in disposing of any collateral.
Loan Approval Authority and Underwriting. The Company has established
various lending limits for its officers and also maintain a loan committee. The
loan committee is comprised of the Chairman of the Board, the President, an
Executive Loan Officer and two non-employee members of the Board of Directors.
The President has authority to approve applications for mortgage loans up to
$300,000, secured loans up to $200,000 and unsecured loans up to $125,000. The
Executive Loan Officer has authority to approve mortgage loans up to $250,000,
secured loans up to $150,000 and unsecured loans up to $100,000. Additionally,
the President, together with the Executive Loan Officer have authority to
approve applications for real estate loans up to $400,000, secured loans up to
$300,000 and unsecured loans up to $150,000. Personal banking officers generally
have authority to approve loan applications between $5,000 and $75,000,
depending upon the loan collateral and type of loan. The loan committee
considers all applications in excess of the authorized lending limits of the
employee officers and the entire Board of Directors ratifies all such loans.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is ordered. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are processed by
independent fee appraisers. Borrowers also must obtain fire and casualty
insurance. Flood insurance is also required on loans secured by property that is
located in a flood zone.
Loan Commitments. Commitments to extend credit are arrangements to lend
to the customer as long as there is no violation of any condition established in
the loan agreement. These commitments are comprised primarily of available
personal and commercial lines of credit, undisbursed construction funding, and
various loans approved but not yet funded. At December 31, 1999, loan
commitments totalled $5,731,000.
Nonperforming and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 15 days past due, a
notice of nonpayment is sent to the borrower. If such payment is not received by
month end, an additional notice of nonpayment is sent to the borrower. After 60
days, if the mortgage loan continues to be delinquent, a notice of right to cure
default is sent to the borrower giving 30 additional days to bring the loan
current before foreclosure is commenced. If the mortgage loan continues in a
delinquent status for 90 days past due and no repayment plan is in effect,
foreclosure proceedings will be initiated.
Loans are reviewed and are placed on a non-accrual status when the loan
becomes more than 90 days delinquent or when, in the Company's opinion, the
collection of additional interest is doubtful. Interest accrued and unpaid at
the time a loan is placed on nonaccrual status is charged against interest
income. Subsequent interest payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. At December 31, 1999, the
Company had no nonperforming loans or problem assets.
A loan is considered impaired when it is probable the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. The Company has determined that first mortgage loans on one- to- four
family properties and all consumer loans represent large groups of
smaller-balance
5
<PAGE>
homogeneous loans that are collectively evaluated. Additionally, the Company has
determined that an insignificant delay (less than 90 days), will not cause a
loan to be classified as impaired and a loan is not impaired during a period of
delay in payment, if it expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay. All loans
identified as impaired are evaluated independently by the Company. The Company
estimate credit losses on impaired loans based on the present value of expected
cash flows or the fair value of the underlying collateral if the loan repayment
is derived from the sale or operation of such collateral. Impaired loans, or
portions of such loans, are charged off when the Company determines that a
realized loss has occurred. Until such time, an allowance for loan losses is
maintained for estimated losses. Cash receipts on impaired loans are applied
first to accrued interest receivable unless otherwise required by the loan
terms, except when an impaired loan is also a nonaccrual loan, in which case the
portion of the receipts related to interest is recognized as income. At December
31, 1999, the Company had no impaired loans.
Classified Assets. OTS regulations provide for a classification system
for problem assets of savings banks which covers all problem assets. Under this
classification system, problem assets of savings banks such as us are classified
as "substandard," "doubtful," or "loss." An asset is considered substandard if
it is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the savings bank will sustain
"some loss" if the deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified substandard, with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as loss are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets may be designated "special mention" because of potential weaknesses that
do not currently warrant classification in one of the aforementioned categories.
When a savings bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings bank classifies problem assets as
loss, it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge off such amount.
A savings bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss allowances. A
portion of general loss allowances established to cover possible losses related
to assets classified as substandard or doubtful may be included in determining a
savings bank's regulatory capital. Specific valuation allowances for loan losses
generally do not qualify as regulatory capital. At December 31, 1999, the
Company had no classified assets.
Allowances for Loan Losses. The Company's allowance for loan losses is
intended to be maintained at a level sufficient to absorb all estimable and
probable losses inherent in the loans receivable portfolio. In determining, the
appropriate level of the allowance for loan losses and, accordingly, the level
of the provision for loan losses, management reviews its loans receivable
portfolio on at least a monthly basis, taking into account: (i) known and
inherent risks in the portfolio, (ii) adverse situations that may affect the
borrower's ability to repay, (iii) the estimated value of any underlying
collateral, and (iv) current economic conditions.
While the Company believes that the allowance for loan losses is
adequate, additions to the allowance for loan losses may be necessary in the
event of future adverse changes in economic and other
6
<PAGE>
conditions that the Company is unable to predict. In addition, the determination
of the amount of the allowance for loan losses is subject to review by the OTS,
as part of its examination process. After a review of the information available,
the OTS might require the establishment of an additional allowance. Any increase
in the loan loss allowance required by the OTS would have a negative impact on
the Company's earnings.
The following table illustrates the allocation of the allowance for
loan losses for each category of loan for the dates indicated. The allocation of
the allowance to each category is not necessarily indicative of future loss in
any particular category and does not restrict the Company's use of the allowance
to absorb losses in other loan categories.
<TABLE>
<CAPTION>
At
December 31,
----------------------------------------------------
1999 1998
------------------------- -----------------------
Percent of Percent of
Loans in Loans in
Each Each
Category to Category to
Amount Total Loans Amount Total Loans
---------- -------------- ------- ---------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
- -------------
Real Estate Loans:
One- to- four family........ $103 54.98% $30 36.47%
Commercial real estate...... 47 23.09 36 18.93
Home equity................. 16 8.44 5 22.02
Construction................ -- 2.65 -- --
Commercial...................... 12 5.81 10 3.60
Consumer........................ 9 5.03 18 18.98
--- ------ -- -----
Total................ $187 100.00% $99 100.00%
==== ====== === ======
</TABLE>
7
<PAGE>
The following table sets forth information with respect to the
Company's allowance for loan losses at the dates indicated.
At
December 31,
-----------------------
1999 1998
------- -------
(Dollars In Thousands)
Total loans outstanding........................... $28,173 $4,532
====== =====
Average loans outstanding......................... $17,127 $1,676
====== =====
Allowance balance at beginning of period.......... $ 99 $ --
Provision:
Real estate loans................................. 89 76
Commercial........................................ 6 5
Consumer.......................................... 4 19
Charge-offs:
Real estate loans................................. -- --
Commercial........................................ -- --
Consumer.......................................... (11) (1)
Recoveries:
Real estate loans................................. -- --
Commercial........................................ -- --
Consumer.......................................... -- --
------- ------
Allowance balances at end of period............... $ 187 $ 99
======= ======
Allowance for loan losses as a percent of total
loans outstanding................................. .66% 2.18%
======= ======
Net loans charged off as percent of average loans
outstanding....................................... .06% .06%
======= ======
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Investment Activities
The Company is required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments. The level of liquid assets varies depending upon
several factors, including: (i) the yields on investment alternatives, (ii)
judgment as to the attractiveness of the yields then available in relation to
other opportunities, (iii) expectation of future yield levels, and (iv)
projections as to the short-term demand for funds to be used in loan origination
and other activities. Investment securities, including mortgage-backed
securities, are classified at the time of purchase, based upon management's
intentions and abilities, as securities held to maturity or securities available
for sale. Debt securities acquired with the intent and ability to hold to
maturity are classified as held to maturity and are stated at cost and adjusted
for amortization of premium and accretion of discount, which are computed using
the level yield method and recognized as adjustments of interest income. All
other debt securities are classified as available for sale to serve principally
as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities require the Company to categorize securities as "held to maturity,"
"available for sale" or "trading." As of December 31, 1999, the Company had
securities classified as "held to maturity" and "available for sale" in the
amount of $1.7 million and $15.9 million, respectively, and had no securities
classified as "trading." Securities classified as "available for sale" are
reported for financial reporting purposes at the fair market value with net
changes in the market value from period to period included as a separate
component of stockholders' equity, net of income taxes. At December 31, 1999,
the Company's securities available for sale had net unrealized losses of
$546,000. These net unrealized losses reflect normal market conditions and vary,
either positively or negatively, based primarily on changes in general levels of
market interest rates relative to the yields on the portfolio. Changes in the
market value of securities available for sale do not affect the Company's
income. In addition, changes in the market value of securities available for
sale do not affect the Bank's regulatory capital requirements or its loan-to-one
borrower limit.
At December 31, 1999, the Company's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) local municipal
obligations, (iv) mortgage-backed securities, (v) collateralized mortgage
obligations, (vi) banker's acceptances, (vii) certificates of deposit, and
(viii) investment grade corporate bonds, commercial paper and mortgage
derivative products. The Board of Directors may authorize additional
investments.
As a source of liquidity and to supplement the Company's lending
activities, the Company has invested in residential mortgage-backed securities.
Mortgage-backed securities can serve as collateral for borrowings and, through
repayments, as a source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of single-family or other type of mortgages.
Principal and interest payments are passed from the mortgage originators,
through intermediaries (generally quasi-governmental agencies) that pool and
repackage the participation interests in the form of securities, to investors,
like the Company. The quasi-governmental agencies guarantee the payment of
principal and interest to investors and include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates
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<PAGE>
or pass-through certificates. The interest rate risk characteristics of the
underlying pool of mortgages (i.e., fixed rate or adjustable rate) and the
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages. Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties. Mortgage-backed securities
issued by FHLMC and GNMA make up a majority of the pass-through certificates
market.
The Company also invests in mortgage-related securities, primarily
collateralized mortgage obligations ("CMOs"), issued or sponsored by GNMA, FNMA,
FHLMC, as well as private issuers. CMOs are a type of debt security that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage- backed securities as opposed to pass through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage-backed securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity.
Securities Portfolio. The following table sets forth the carrying value
of the Company's securities portfolio at the dates indicated:
At
December 31, 1999
------------------------
1999 1998
------- -------
(In Thousands)
Securities available for sale:
U.S. government agency securities.......... $ 5,541 $ 5,719
Corporate securities....................... 3,526 3,521
Collateralized mortgage obligations........ 4,393 --
Mortgage-backed securities................. 1,937 3,604
FHLB stock................................. 475 307
Securities held to maturity:
Mortgage-backed securities................. 1,675 --
------- -------
Total investment securities.................. $17,547 $13,151
======= =======
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<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, estimated fair values, and weighted average yields
for the Company's investment securities portfolio at December 31, 1999 by
contractual maturity. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------------------------------------------------------------------------------------
More than More than
Within One to Five to More than
One Year Five Years Ten Years Ten Years Total Investment Securities
------------------- ------------------- ------------------ ----------------- -----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
agency securities... $ -- --% $1,543 5.64% $3,998 6.12% $ -- --% $5,541 5.99% $5,541
Corporate
securities.......... -- -- 494 5.85 -- -- 3,032 6.75 3,526 6.63 3,526
Collateralized
mortgage
obligations........ -- -- -- -- -- -- 4,393 6.83 4,393 6.83 4,393
Mortgage-backed
securities.......... -- -- -- -- 785 5.84 2,827 6.19 3,612 6.12 3,537
FHLB stock............ 475 6.75 -- -- -- -- -- 475 6.75 475
---- ------ ------ ------- ------- -------
Total investment
securities....... $475 6.75% $2,037 5.69% $4,783 6.08% $10,252 6.63% $17,547 6.19% $17,472
==== ==== ====== ==== ====== ==== ======= ==== ======= ==== =======
</TABLE>
11
<PAGE>
Sources of Funds
Deposits are the Company's major external source of funds for lending
and other investment purposes. Funds are also derived from the receipt of
payments on loans and prepayment of loans and maturities of investment
securities and mortgage-backed securities and, to a much lesser extent,
borrowings and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's market area through the offering of a selection of
deposit instruments including checking and savings accounts, money market
accounts, and term certificate accounts. IRA accounts and NOW accounts are also
offered. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit, and the interest rate.
The interest rates paid by the Company on deposits are set at the
direction of senior management. Interest rates are determined based on the
Company's liquidity requirements, interest rates paid by the Company's
competitors, and the Company's growth goals and applicable regulatory
restrictions and requirements. At December 31, 1999, the Company had no brokered
deposits.
The following table indicates the amount of certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 1999.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Within three months $ 949
Three through six months 603
Six through twelve months 200
Over twelve months 685
------
$2,437
======
Borrowings. The Company may obtain advances (borrowings) from the FHLB
of Pittsburgh ("FHLB") to supplement its supply of lendable funds. Advances from
the FHLB are secured by investments held in safe keeping at the FHLB. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. If the need arises, the Company may also access the Federal
Reserve Bank discount window to supplement the Company's supply of lendable
funds and to meet deposit withdrawal requirements.
12
<PAGE>
The following table sets forth information concerning borrowings during
the periods indicated.
At or For the Years Ended
December 31,
-------------------
1999 1998
---- ----
(Dollars in Thousands)
FHLB advances:
Ending balance ................................ $8,600 $5,000
Average balance during the period.............. 7,290 832
Maximum month-end balance during the period.... 9,100 5,000
Average interest rate during the period........ 4.97% 4.39%
Weighted average rate at period end............ 6.40% 4.32%
Employees
At December 31, 1999 the Company had 13 full-time and 2 part-time
employees. None of the employees are represented by a collective bargaining
group. The Company believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Nittany and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Recent Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
Despite its sweeping reform of the nation's banking industry, however,
the Act will have few direct effects on the operations or powers of most savings
associations or savings and loan holding companies. The Act terminates the
"unitary thrift holding company exemption" on a prospective basis and generally
prohibits new savings and loan holding companies from engaging in nonfinancial
activities or affiliating with a nonfinancial entity. However, as a
grandfathered unitary thrift holding company, the Company will retain its
unrestricted authority to engage in nonfinancial activities.
13
<PAGE>
The Act also imposes significant new financial privacy obligations and
reporting requirements on all financial institutions, including federal savings
associations. Specifically, the statute, among other things, will require
financial institutions (a) to establish privacy policies and disclose them to
customers both at the commencement of a customer relationship and on an annual
basis and (b) to permit customers to opt out of a financial institution's
disclosure of financial information to nonaffiliated third parties. The Act
requires the federal financial regulators to promulgate regulations implementing
these provisions within six months of enactment, and the statute's privacy
requirements will take effect one year after enactment.
Regulation of Nittany
Nittany (the "Company") is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. Accordingly, the Company is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and the Company's non-savings association subsidiary, Nittany Asset
Management, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of Nittany Bank and not for the benefit of stockholders of the
Company.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions, provided the Bank satisfies the Qualified
Thrift Lender ("QTL") test. The Act terminated the "unitary thrift holding
company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Company is grandfathered under this
provision of the Act, its unitary holding company powers and authorities were
not affected. However, if the Company were to acquire control of an additional
savings association, its business activities would be subject to restriction
under the Home Owners' Loan Act. Furthermore, if the Company were in the future
to sell control of the Bank to any other company, such company would not succeed
to the Company's grandfathered status under the Act and would be subject to the
same business activity restrictions. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Company's Board of Directors on
any deficiencies that are found in the Company's operations. The Bank's
relationship with its depositors and borrowers are also regulated to a great
extent by federal and state law, especially in such matters as the ownership of
savings accounts and the form and content of the Company's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination
14
<PAGE>
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
The deposit accounts held by the Bank are insured by the BIF to a
maximum of $100,000 for each insured member (as defined by law and regulation).
The Bank is required to pay insurance premiums based on a percentage of its
insured deposits to the FDIC for insurance of its deposits by the BIF. The FDIC
also maintains another insurance fund, the Savings Institution Insurance Fund
("SAIF"), which primarily insures commercial bank deposits. The FDIC has set the
deposit insurance assessment rates for BIF-member institutions for the first six
months of 2000 at 0% to .027% of insured deposits on an annualized basis, with
the assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
Loans to One Borrower. The maximum amount of loans which the Bank is
able to make to any one borrower may not exceed the greater of $500,000 or 15%
of the bank's unimpaired capital and surplus. As of December 31, 1999, the
Bank's lending limit to any one borrower was $755,000. The Bank may lend an
additional 10% of its unimpaired capital and surplus if the loan is fully
secured by readily marketable collateral. The Bank commonly originates loans in
excess of this limit by selling a participation interest in the loan to other
financial institutions.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets (or 3.0% if the institution is rated
composite 1 under the OTS examination rating system) and (3) a risk-based
capital requirement equal to 8.0% of total risk-weighted assets. In addition,
the OTS prompt corrective action regulation provides that a savings institution
that has a leverage capital ratio of less than 4% (3% for institutions receiving
the highest examination rating) will be deemed to be "undercapitalized" and may
be subject to certain restrictions. Nittany Bank significantly exceeds all
minimum regulatory capital requirements. Additionally, in accordance with the
FDIC order approving the Bank's application for Federal Deposit Insurance, the
Bank must maintain a ratio of Tier 1 capital to average assets of at least 8%
for a period of three years, from the opening of Nittany Bank on October 26,
1998. At December 31, 1999, the Bank exceeded its minimum risk-based and
leverage capital ratios requirements. The Bank's Total risk-based, Tier I
risk-based, core capital and tangible capital ratios were 17.8%, 17.2%, 9.8% and
9.8%, respectively.
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as Nittany Bank must file an application or a notice with
the OTS at least 30 days before making a capital distribution. Savings
associations are not required to file an application for permission to make a
capital distribution, and need only file a notice, if the following conditions
are met: (1) they are eligible for expedited treatment under OTS regulations,
(2) they would remain adequately capitalized after the distribution, (3) the
annual amount of capital distribution does not exceed net income for that
calendar year to date added to retained net income for the two preceding years,
and (4) the capital distribution would not violate any agreements between the
OTS and the savings association or any OTS regulations. Any other situation
would require an application to the OTS.
15
<PAGE>
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments"
(defined to include residential mortgages and related equity investments,
certain mortgage-related securities, small business loans, student loans and
credit card loans, and 50% of certain community development loans). For purposes
of the statutory QTL test, portfolio assets are defined as total assets minus
intangible assets, property used by the institution in conducting its business,
and liquid assets equal to 10% of total assets. A savings institution must
maintain its status as a QTL on a monthly basis in at least nine out of every 12
months. A failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction on
obtaining additional advances from its FHLB. At December 31, 1999, the Bank was
in compliance with the QTL requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Pittsburgh, which is one of 12 regional FHLBs that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations or 5%
of its outstanding borrowings to the FHLB of Pittsburgh, at the beginning of
each year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1999, the Bank was in
compliance with OTS liquidity requirements.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 1999, the Bank was in compliance with these Federal Reserve Board
requirements through its accounts at the FHLB.
16
<PAGE>
Item 2. Description of Property
- -------------------------------
(a) Property.
The Company operates from its main office and one branch office. Both
properties are leased. See "Item 1. Business"
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Company's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. Nittany Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business - Lending Activities and - Regulation of the Bank."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not applicable.
Item 3. Legal Proceedings
- -------------------------
From time to time, the Company may become involved in litigation as an
incident to its business. the Company is presently not included in any
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the
Company's fourth quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
(a) Nittany's common stock is listed on the Electronic Bulletin Board
under the symbol "NTNY." E.E. Powell & Co., Inc., Ryan Beck & Co., and Hopper
Soliday & Co. have acted as market makers for the common stock. These market
makers have no obligation to make a market for Nittany's common stock, and they
may discontinue making a market at any time.
The information in the following table indicates the high and low
closing prices for the common stock, based upon information provided by the
market makers. These quotations reflect inter-dealer prices,
17
<PAGE>
without retail mark-up, markdown, or commission, do not reflect actual
transactions, and do not include nominal amounts traded directly by shareholders
or through other dealers who are not market makers.
High Low
---- ---
1999
- ----
Fourth Quarter.......................................... 11.25 9.50
Third Quarter........................................... 11.75 10.50
Second Quarter.......................................... 11.75 10.38
First Quarter........................................... 11.25 10.38
1998
- ----
Fourth Quarter.......................................... 12.00 10.50
Third Quarter (October 23, 1999 - October 26, 1999)..... 10.00 10.00
Nittany currently has no intention of paying cash dividends in the
foreseeable future. Payment of cash dividends is conditioned on earnings,
financial condition, cash needs, the discretion of the Board of Directors and
compliance with regulatory requirements. The's ability to pay dividends to
stockholders is dependent upon the dividends it receives from the Bank. The Bank
may not declare or pay a cash dividend on any of its stock if the effect of such
payment would cause its regulatory capital to be reduced below the regulatory
requirements imposed by the OTS. The number of shareholders of record of common
stock as of December 31, 1999, was approximately 478, which included the number
of persons or entities who held stock in nominee or "street" name through
various brokerage firms.
(b) Use of Proceeds from Registered Securities
(1) the effective date of the Form SB-2 was December 6, 1999, and
the Commission file number was 333-90793.
(2) The offering commenced on December 10, 1999.
(3) Not applicable.
(4) (i) The offering has not terminated. The offering is
expected to terminate on March 31, 2000.
(ii) The name of the managing underwriter: None
(iii) Common stock, par value $.10 per share was
registered;
(iv) Amount registered - 230,000 shares (of which 67,562
were previously registered and remained unsold at the
time of the offering).
Aggregate price of offering amount registered -
$1,786,816; Amount sold - 79,040 on December 31,
1999; 42,528 on February 3, 2000. Aggregate offering
price of stock sold as of February 3, 2000 -
$1,337,248
(v) Expenses of the offering which were direct or
indirect payments to others;
Expense paid to and for underwriters: None
Other expenses - $49,205;
Total expenses - $49,205;
18
<PAGE>
(vi) Net offering proceeds - $1,288,043;
(vii) Direct or indirect payments to affiliates:
Purchase outstanding stock of subsidiary bank -
$1,152,000; Noninterest checking account with
subsidiary bank - $135,235
(viii) Not applicable
Item 6. Management's Discussion and Analysis
- ----------------------------------------------
General
Nittany Bank commenced operations as of October 26, 1998, and its
activities have primarily consisted of offering deposits, originating loans and
servicing the deposits acquired from First Commonwealth Bank (the "Branch
Acquisitions"). Prior to October 26, 1998, the Nittany's primary activities
centered on the formation of Nittany Bank.
On May 24, 1999, Nittany Asset Management was formed and incorporated
as a Pennsylvania corporation. Nittany Asset Management is a wholly-owned
subsidiary of the Company 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. Nittany Asset Management began service
operations in November 1999.
On December 10, 1999, Nittany commenced an additional common stock
offering to sell up to 200,000 shares of its common stock at $11.00 per share.
The offering is not underwritten and is not subject to the sale of any minimum
number or dollar amount of shares. The offering will terminate no later than
March 31, 2000. At December 31, 1999, Nittany sold and issued 79,040 shares
increasing the Company's outstanding common shares to 656,476 shares. The
aggregate net proceeds from the offering through December 31, 1999 were
$820,235, of which $800,000 was contributed as capital to Nittany Bank.
Asset/Liability Management
The Company's net interest income is sensitive to changes in interest
rates, as the rates paid on interest-bearing liabilities generally change faster
than the rates earned on interest-earning assets. As a result, net interest
income will frequently decline in periods of rising interest rates and increase
in periods of decreasing interest rates.
The Company seeks to manage interest rate sensitivity through its asset
and liability committee which is comprised of members of management and the
board of directors. The committee generally meets quarterly to monitor the
impact of interest rate risk and develops strategies to manage its liquidity,
shorten the effective maturities of certain interest earning assets and increase
the effective maturities of certain liabilities, to reduce the exposure to
interest rate fluctuations. These strategies include focusing its investment
activities on short and medium-term securities, emphasizing shorter-term loans
and loans with adjustable rate features and maintaining and increasing the
transaction deposit accounts, as these accounts are considered to be relatively
resistant to changes in interest rates and utilizing deposit marketing programs
to adjust the term or repricing of its liabilities.
19
<PAGE>
Net Portfolio Value
The Company computes amounts by which the net present value of cash
flow from assets, liabilities and off balance sheet items ("net portfolio value"
or "NPV") would change in the event of a range of assumed changes in market
interest rates. The Interest Rate Sensitivity of Net Portfolio Value Report
shows the degree to which balance sheet line items and net portfolio value are
potentially affected by a 100 to 300 basis point (1/100th of a percentage point)
upward and downward parallel shift (shock) in the Treasury yield curve.
The following table represents the Company's NPV at December 31, 1999.
The NPV was calculated by the OTS, based upon information that the Company
provided to the OTS.
Changes in Rates NPV Ratio%(1) Change(2)
---------------- ------------- ---------
+300 bp 6.12 -471 bp
+200 bp 8.00 -284 bp
+100 bp 9.50 -133 bp
Unchanged 10.84 --
-100 bp 11.72 88 bp
-200 bp 12.48 164 bp
-300 bp 13.43 260bp
- ------------
(1) Calculated as the estimated NPV divided by present value of total assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
The calculations in the above table indicate that the Company's net
portfolio value are likely to be adversely affected by increases in interest
rates but are likely to be favorably affected by decreases in interest rates.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
20
<PAGE>
Comparison of Financial Condition
The Company has continued to experience strong growth during the year
ended December 31, 1999 with total assets increasing 101.9% to $50,045,000 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 $23,556,000 and was
funded through growth in various deposit products totaling $21,791,000 and a net
increase in advances from the Federal Home Loan Bank of $3,600,000.
At the year ended December 31, 1999, total cash and cash equivalents
totaled $3,058,000 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.
Total investment securities increased $4,396,000 or 33.4% to
$17,547,000 at December 31, 1999 from $13,151,000 at December 31, 1998. The
growth within the investment portfolio was primarily structured toward
mortgage-backed securities and collateralized mortgage obligations with varying
maturities between 6 and 29 years.
Net loan receivables increased from $4,424,000 at December 31, 1998 to
$27,980,000 at December 31, 1999. Of this increase, approximately 91.7% or
$21,609,000 was comprised of real estate loans. The real estate lending growth
included $14,474,000 in one- to- four family mortgages and $5,756,000 in
commercial real estate. Additionally, $1,379,000 was added during the year in
home equity loans. Such increases primarily reflected the strong economy of the
Company's market area and the strategic, service-oriented marketing approach
taken by management to meet the lending needs of the area. As of December 31,
1999, the Company had outstanding loan funding commitments of approximately
$7,300,000.
At December 31, 1999, the Company's allowance for loan losses increased
approximately $88,000 to $187,000 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 the Company's market area, the impact of
economic conditions on borrowers and other relevant factors that may come to the
attention of management. Although the Company maintains an allowance for loan
losses at a level that it considers to be adequate to provide for the inherent
risk of loss in its loan portfolio, there can be no assurance that additions to
the loan loss reserve will not be required in future periods.
Deposits increased $21,791,000 or 155.7% to $35,783,000 at December 31,
1999 compared to $13,992,000 at December 31, 1998. The growth was spread among
three primary deposit types: money market and savings accounts of $10,085,000,
time deposits of $6,343,000 and demand deposits $5,363,000, respectively. Such
growth resulted primarily from the marketing efforts of promoting competitive
interest rates and 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 December 31, 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
such investments purchased and the related expenses incurred on borrowed funds
will provide an additional source of income. All of the advances from the
Federal Home Loan Bank, are due to mature
21
<PAGE>
within the next year. Of the total outstanding borrowings, $8,000,000, of
borrowings were classified as LIBOR based floating rate arrangements and
$600,000 were fixed rate in nature.
For the year ending December 31, 1999, the accumulated other
comprehensive loss increased $515,000 to $546,000, from $31,000 at December 31,
1998. The increase in loss resulted from the decrease in market value of the
Company's investment securities available for sale which was caused by a general
increase in market interest rates. Because of interest rate volatility, the
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 will not affect the
Company's net income unless the securities are sold. The Company currently plans
to hold these securities until maturity or until the market values of these
securities increase. Accordingly, the Company does not expect, though there is
no assurance, that the investment in these securities will affect net income in
future periods.
Results of Operations
Net Interest Income. The Company's results of operations are primarily
-------------------
dependent on its net interest income, which is the difference between the
interest income earned on assets, primarily loans and investments, and the
interest expense on liabilities, primarily deposits and borrowings. Net interest
income may be affected significantly by general economic and competitive
conditions and policies of regulatory agencies, particularly those with respect
to market interest rates. The results of operations are also influenced by the
level of non-interest expenses, such as employee salaries and benefits and other
income, such as loan-related fees and fees on deposit-related services.
Net interest income for the year ended December 31, 1999 was $994,000.
The interest rate spread for the year ended December 31, 1999 was 2.05%,
increasing by 105% over the 1998 level. Despite a slight increase in general
interest rate levels during the period, both interest income and expense were
driven primarily by significant increases in average balances of
interest-earning assets and interest-bearing liabilities. Of the $17,878,000 and
$18,920,000 increase in average interest-earning assets and interest-bearing
liabilities, respectively, during the year ended December 31, 1999, $15,451,000
and $12,462,000, were primarily the result of loan and deposit growth,
respectively.
Average Balance Sheet and Interest Analysis. The following table sets
--------------------------------------------
forth certain information relating to the Company's average balance sheet and
reflects the average yield on assets and average cost of liabilities for the
periods indicated and the average yields earned and rates paid. Such yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the year ended December 31, 1999 and for the
period of October 26, 1998 to December 31, 1998. Average balances are derived
from daily balances.
22
<PAGE>
<TABLE>
<CAPTION>
For the Period Ended December 31,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest(1) Yield/Cost(4)
------- -------- ---------- ------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............................. $ 17,127 $1,338 7.81% $ 1,676 $ 25 9.03%
Investments securities....................... 16,756 1,012 6.04% 6,734 61 5.42%
Interest-bearing deposits with other banks... 2,813 99 3.54% 10,408 100 4.98%
-------- ------ ------- ----
Total interest-earning assets.................. 36,696 2,449 6.67% 18,818 186 5.50%
------ ----
Noninterest-earning assets..................... 1,658 874
Allowance for loan losses...................... (122) (97)
-------- -------
Total assets................................... $ 38,232 $19,595
======== =======
Interest-bearing liabilities:
Interest-bearing demand deposits............. $ 3,480 73 2.11% $2,064 6 1.64%
Money market deposits........................ 11,837 583 4.93% 3,395 28 4.96%
Savings deposits............................. 1,557 53 3.38% 1,521 9 3.47%
Certificates of deposit...................... 7,331 383 5.23% 4,763 46 5.77%
Advances from FHLB........................... 7,290 363 4.97% 832 6 4.39%
-------- ------ ------- ----
Total interest-bearing liabilities............. $ 31,495 1,455 4.62% $12,575 95 4.50%
-------- ----- ------- ---
Noninterest-bearing liabilities
Demand deposits.............................. $ 1,793 $ 779
Other liabilities............................ 247 814
Stockholders' equity........................... 4,697 5,427
-------- -------
Total liabilities and stockholders' equity..... $ 38,232 $19,595
======== =======
Net interest income............................ $ 994 $ 91
====== ====
Interest rate spread (2)....................... 2.05% 1.00%
Net yield on interest-earning assets(3)........ 2.71% 2.49%
Ratio of average interest-earning assets to
average interest-bearing liabilities.......... 116.51% 149.65%
</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.
23
<PAGE>
Rate/Volume Analysis. The following table sets forth certain
information regarding changes in interest income and interest expense of the
Bank for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (changes in average volume multiplied by old rate) and
(ii) changes in rate (changes in rate multiplied by old volume). Increases and
decreases due to both rate and volume, which cannot be separated, have been
allocated to the change due to volume.
Year Ended December 31,
------------------------------
1999 vs. 1998
------------------------------
Increase (Decrease)
------------------------------
Due to
Volume Rate Total
------ ---- -----
(In Thousands)
Interest-earning assets:
Loans receivable .............................. $ 1,543 $ (231) $ 1,312
Investment securities ......................... 798 154 952
Interest-bearing deposits with other banks .... (1) -- (1)
------- ------- -------
Total interest-earning assets ............... $ 2,340 $ (77) $ 2,263
------- ------- -------
Interest-bearing liabilities:
Interest-bearing demand deposits ............. $ 40 $ 27 $ 67
Money market ................................. 560 (5) 555
Savings deposits ............................. 48 (4) 44
Certificates of deposit ...................... 462 (125) 337
Advances from FHLB ........................... 310 47 357
------- ------- -------
Total interest-bearing liabilities ......... $ 1,420 $ (60) $ 1,360
------- ------- -------
Increase (decrease) in net interest income .... $ 920 $ (17) $ 903
======= ======= =======
Non-Interest Income. Non-interest income for the year ending December
--------------------
31, 1999 was $171,000. Non-interest income items are primarily comprised of
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. Non-interest expense for the year ending December
--------------------
31, 1999 was $1,293,000. Non-interest expenses are comprised primarily of
compensation and benefits, occupancy and equipment, data processing, and other
non-interest expenses. The increases in these operational expenses 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 for a full year, as
compared to an abbreviated banking operation of two months in 1998. Included in
other non-interest expenses for the year ended December 31, 1999, is a
non-recurring charge of $41,000. This expense was incurred in connection with
settlement activities of accounts subsequent to the purchase of deposits in the
branch acquisitions. In
24
<PAGE>
the year ended December 31, 1999, other non-interest expense increased
approximately $168,000 from fiscal 1998, primarily as a result of normal costs
in running a public company for a full year.
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 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 Company's
financial position or results of operations.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments on loans, proceeds from maturities, sales
and repayments of investment securities and FHLB advances. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. Management monitors liquidity daily, and on
a monthly basis incorporates liquidity management into its asset/liability
management program.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At December 31, 1999, cash and
interest-bearing deposits with other Bank's totaled $3,600,000 or 7.7% of total
assets, and investment securities classified as available for sale totaled
$16,100,000 or 34.6% of total assets. The Company maintains a credit facility
with the FHLB of Pittsburgh, which provides for immediately available advances.
Advances under this credit facility totaled $8,600,000 at December 31, 1999. In
addition, the Bank has access to funds through the discount window at the
Federal Reserve Bank.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. The Bank's actual required liquid asset ratio at December 31, 1999
was 25.0%.
The primary investing activity of the Company is the origination of
mortgage loans. During the year ended December 31, 1999 the Company originated
loans amounting to $19,400,000. At December 31, 1999, the Company had loan and
lines of credit commitments totaling $5,731,000. The Company anticipates that it
will have sufficient funds available to meet its current loan origination
commitments. Time certificates of deposit that are scheduled to mature in less
than one year from December 31, 1999 totaled $6,300,000. The Company expects
that it will retain a majority of maturing certificates accounts.
The Bank is required to maintain specific amounts of capital pursuant
to OTS requirements. As of December 31, 1999, the Bank was in compliance with
all applicable regulatory capital requirements.
25
<PAGE>
For a discussion of regulatory capital requirements applicable to the Bank, see
"Regulation -- Regulation of the Bank -- "Regulatory Capital Requirements."
Year 2000
The Company relies on computers to conduct its business and information
systems processing. Industry experts were concerned that on January 1, 2000,
some computers might not be able to interpret the new year properly, causing
computer malfunctions. Some banking experts remain concerned that some computers
may not be able to interpret additional dates in the year 2000 properly. The
Company has operated and evaluated its computer operating systems following
January 1, 2000 and has not identified any errors or experienced any computer
system malfunctions. Nevertheless, the Company continues to monitor its
information systems to assess whether its systems are at risk of misinterpreting
any future dates and will develop, if needed, appropriate contingency plans to
prevent any potential system malfunction or correct any system failures. The
Company has not been informed of any such problems experienced by its vendors or
its customers. However, it is too soon to conclude that there will not be any
problems arising from the year 2000 problem. The Company will continue to
monitor its significant vendors of goods and services and customers with respect
to any year 2000 problems they may encounter, as those issues may effect its
ability to continue operations, or might adversely affect the company's
financial position, results of operations and cash flows. At this time, the
Company does not believe that these potential problems will materially impact
the ability to continue operations. However, any delays, mistakes, or failures
could have a significant impact on the Company's financial condition and
profitability.
Return On Equity And Assets Ratios
At Or For The Years
Ended December 31,
--------------------------
1999 1998
Equity to Asset Ratio....................... 12.29% 27.70%
Return on Average Equity.................... (4.84) (9.21)
Return on Average Assets.................... (.60)% (2.55)%
Dividend Payout Ratio....................... -- --
26
<PAGE>
Item 7. Financial Statements
- ------------------------------
27
<PAGE>
SNODGRASS
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Nittany Financial Corp.
We have audited the consolidated balance sheet of Nittany Financial Corp. and
its subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nittany Financial
Corp. and its subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/S.R. Snodgrass, A.C.
- -----------------------
Wexford, PA
February 25, 2000
28
<TABLE>
<CAPTION>
<S> <C> <C> <C>
S.R. Snodgrass, A.C.
1000 Stonewood Drive, Suite 200 Wexford, PA 15090-8399 Phone: 724-934-0344 Facsimile: 724-934-0345
</TABLE>
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 826,181 $ 307,443
Interest-bearing deposits with other banks 2,231,694 5,621,800
Investment securities available for sale 15,872,402 13,150,768
Investment securities held to maturity (approximate
market value of $1,599,740) 1,674,729 -
Loans receivable (net of allowance for loan losses
of $186,647 and $98,988) 27,979,708 4,424,132
Premises and equipment 175,587 126,160
Intangible assets 894,392 941,886
Accrued interest and other assets 390,031 218,394
----------------- -----------------
TOTAL ASSETS $ 50,044,724 $ 24,790,583
================= =================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 2,626,107 $ 777,400
Interest-bearing demand 5,659,727 2,146,171
Money market 15,032,313 5,409,434
Savings 1,732,077 1,269,834
Time 10,733,000 4,389,545
----------------- -----------------
Total deposits 35,783,224 13,992,384
FHLB advances 8,600,000 5,000,000
Commitment to purchase investment security - 500,000
Accrued interest payable and other liabilities 430,097 144,546
----------------- -----------------
TOTAL LIABILITIES 44,813,321 19,636,930
----------------- -----------------
STOCKHOLDERS' EQUITY
Serial preferred stock, no par value; 5,000,000 shares
authorized, none issued
- -
Common stock, $.10 par value; 10,000,000 shares
authorized, 656,476 and 577,436 issued and outstanding
65,648 57,744
Additional paid-in capital 6,464,476 5,652,145
Retained deficit (752,781) (525,650)
Accumulated other comprehensive loss (545,940) (30,586)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 5,231,403 5,153,653
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,044,724 $ 24,790,583
================= =================
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 1,337,470 $ 25,301
Interest-bearing deposits with other banks 99,463 100,474
Investment securities 1,011,937 61,029
------------------- ------------------
Total interest and dividend income 2,448,870 186,804
------------------- ------------------
INTEREST EXPENSE
Deposits 1,092,510 88,535
FHLB advances 362,683 6,105
------------------- ------------------
Total interest expense 1,455,193 94,640
------------------- ------------------
NET INTEREST INCOME 993,677 92,164
Provision for loan losses 98,760 100,000
------------------- ------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 894,917 (7,836)
------------------- ------------------
NONINTEREST INCOME
Service fees on deposit accounts 167,593 13,120
Investment securities gain 1,342 -
Other 1,766 -
------------------- ------------------
Total noninterest income 170,701 13,120
------------------- ------------------
NONINTEREST EXPENSE
Compensation and employee benefits 551,875 194,129
Occupancy and equipment 200,447 46,961
Data processing 125,363 17,178
Other 415,064 246,889
------------------- ------------------
Total noninterest expense 1,292,749 505,157
------------------- ------------------
Loss before income taxes (227,131) (499,873)
Income taxes - -
------------------- ------------------
NET LOSS $ (227,131) $ (499,873)
=================== ==================
LOSS PER SHARE
Basic and diluted $ (0.39) $ (3.62)
AVERAGE SHARES OUTSTANDING
Basic and diluted 577,436 138,049
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Additional Compre- Stock Compre-
Common Paid-in Retained hensive holders' hensive
Stock Capital Deficit Loss Equity Loss
-------- ---------- ----------- ---------------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ $ (25,777) $ - $ (25,777)
Net loss (499,873) (499,873) $ (499,873)
Other comprehensive loss:
Unrealized loss on available for sale securities (30,586) (30,586) (30,586)
-----------
Comprehensive loss $ (530,459)
===========
Sale of 29,998 shares of common stock to
company organizers 3,000 296,980 299,980
Sale of 537,438 shares of common stock, issued
October 26, 1998, net of offering costs 53,744 5,256,165 5,309,909
Issuance of 10,000 shares of common stock in
settlement of branch office acquisitions 100,000
1,000 99,000
------- ---------- ---------- -------- -----------
Balance, December 31, 1998 57,744 5,652,145 (525,650) (30,586) 5,153,653
Net loss (227,131) (227,131) $ (227,131)
Other comprehensive loss:
Unrealized loss on available for sale securities (515,354) (515,354) (515,354)
-----------
Comprehensive loss $ (742,485)
===========
Sale of 79,040 shares of common stock, issued
December 31, 1999, net of offering costs 7,904 812,331 820,235
------ ---------- ---------- ------------ -----------
Balance, December 31, 1999 $65,648 $ 6,464,476 $ (752,781) $ (545,940) $ 5,231,403
====== ========== ========== ============ ============
1999 1998
----------- -----------
Components of accumulated other comprehensive loss:
Change in net unrealized loss on
investment securities available for sale $ (514,012) $ (30,586)
Realized gain included in net loss (1,342) -
----------- ------------
Total $ (515,354) $ (30,586)
=========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE>
NITTANY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (227,131) $ (499,873)
Adjustments to reconcile net loss to net cash
used for operating activities:
Provision for loan losses 98,760 100,000
Depreciation, amortization, and accretion, net 140,190 15,567
Investment securities gain (1,342) -
Increase in accrued interest receivable (180,613) (165,446)
Increase in accrued interest payable 275,826 94,345
Other, net 18,701 (57,973)
----------------- -----------------
Net cash provided by (used for) operating activities 124,391 (513,380)
----------------- -----------------
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases (7,595,947) (12,740,623)
Proceeds from sale 428,555 -
Proceeds from principal repayments and maturities 3,391,795 55,616
Investment securities held to maturity:
Purchases (1,945,065)
Proceeds from principal repayments and maturities 272,404
Net increase in loans receivable (23,667,224) (3,829,403)
Branch office acquisitions:
Purchase of loans - (694,729)
Purchase of premises and equipment - (28,862)
Net deposit proceeds - 9,326,707
Purchase of premises and equipment (91,352) (101,304)
----------------- -----------------
Net cash used for investing activities (29,206,834) (8,012,598)
----------------- -----------------
FINANCING ACTIVITIES
Net increase in deposits 21,790,840 3,815,883
Proceeds from FHLB advances 8,600,000 5,000,000
Repayment of FHLB advances (5,000,000) -
Net proceeds from sale of common stock 820,235 5,609,889
----------------- -----------------
Net cash provided by financing activities 26,211,075 14,425,772
----------------- -----------------
Increase (decrease) in cash and cash equivalents (2,871,368) 5,899,794
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,929,243 29,449
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,057,875 $ 5,929,243
================= =================
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid during the year for:
Interest on deposits and FHLB advances $ 1,179,367 $ 61,827
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE>
NITTANY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
- ----------------------------------------------
Nittany Financial Corp. (the "Company") began the formation process on October
9, 1997, and was incorporated under the laws of the State of Pennsylvania on
December 8, 1997, for the purpose of becoming a unitary savings and loan holding
company that would own all of the outstanding shares of common stock of Nittany
Bank (the "Bank") a federal stock savings bank. A second wholly-owned operating
subsidiary of the Company, Nittany Asset Management, Inc. ("Nittany") was
incorporated in May 1999, and began operations in November primarily to offer
various types of investment products and services. The Company's business is
conducted by its wholly-owned subsidiaries, the Bank and Nittany, both located
in State College, Pennsylvania. The Bank's principal sources of revenue are
derived from its commercial, commercial mortgage, residential real estate, and
consumer loan financing and investment portfolios. The Company and Nittany are
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System, while the Bank is subject to regulation and supervision by the
Office of Thrift Supervision ("OTS").
Prior to October 26, 1998, the date the Bank commenced its banking operations,
the Company's operations were limited to in-formation procedures; raising
capital, recruiting officers and staff, obtaining a banking facility, and
working towards obtainment of regulatory approval. Since the Company's planned
principal operations had not yet commenced, no significant revenue was derived
therefrom.
The consolidated financial statements of the Company include the accounts of its
wholly-owned subsidiaries, the Bank and Nittany. All intercompany transactions
have been eliminated in consolidation. The investment in subsidiaries on the
parent company's financial statements is carried at the parent company's equity
in the underlying net assets.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the balance
sheet date and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment Securities
- ---------------------
Investment securities, including mortgage-backed securities, are classified at
the time of purchase, based upon management's intentions and ability, as
securities held to maturity or securities available for sale. Debt securities
acquired with the intent and ability to hold to maturity are classified as held
to maturity and are stated at cost and adjusted for amortization of premium and
accretion of discount, which are computed using the level yield method and
recognized as adjustments of interest income. All other debt securities are
classified as available for sale to serve principally as a source of liquidity.
Unrealized holding gains and losses on available for sale securities are
reported as a separate component of stockholders' equity until realized.
Realized securities gains and losses are computed using the specific
identification method. Interest and dividends on investment securities are
recognized as income when earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership in
an institution that is wholly-owned by other financial institutions. This equity
security is accounted for at cost.
33
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Receivable
- ----------------
Loans receivable are stated at their unpaid principal amounts, net of the
allowance for loan losses. Interest on loans is recognized as income when earned
on the accrual method. Interest accrued on loans more than 90 days delinquent is
generally offset by a reserve for uncollected interest and is not recognized as
income.
The accrual of interest is generally discontinued when management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest is charged against income.
Interest received on nonaccrual loans is either applied to principal or reported
as interest income, according to management's judgment as to the collectibility
of principal.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as adjustments of the related loan's
yield. The Company is amortizing these amounts over the contractual life of the
related loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses which is
charged to operations. The provision is based on management's evaluation of the
adequacy of the allowance for loan losses which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan losses,
including the amounts and timing of future cash flows expected on impaired
loans, are particularly susceptible to significant changes in the near term.
A loan is considered impaired when it is probable the borrower will not repay
the loan according to the original contractual terms of the loan agreement.
Management has determined that first mortgage loans on one-to-four family
properties and all consumer loans represent large groups of smaller-balance
homogeneous loans that are to be collectively evaluated. Loans that experience
insignificant payment delays, which are defined as 90 days or less, generally
are not classified as impaired. A loan is not impaired during a period of delay
in payment if the Company expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay. All commercial
and commercial real estate loans identified as impaired are evaluated
independently by management. The Company estimates credit losses on impaired
loans based on the present value of expected cash flows or the fair value of the
underlying collateral if the loan repayment is expected to come from the sale or
operation of such collateral. Impaired loans, or portions thereof, are charged
off when it is determined that a realized loss has occurred. Until such time, an
allowance for loan losses is maintained for estimated losses. Cash receipts on
impaired loans are applied first to accrued interest receivable unless otherwise
required by the loan terms, except when an impaired loan is also a nonaccrual
loan, in which case the portion of the receipts related to interest is
recognized as income.
Premises and Equipment
- ----------------------
Premises, leasehold improvements, and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the useful lives of the related
assets. Expenditures for maintenance and repairs are charged to operations as
incurred. Costs of major additions and improvements are capitalized.
34
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Income Taxes
- --------------------
Income tax expense consists of current and deferred taxes. Current income tax
provisions or benefits approximate taxes to be paid or refunded for the
applicable year. Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rates. Deferred income tax expenses
or benefits are based on the changes in the deferred tax asset or liability from
period to period.
Recognition of deferred tax assets is based on management's belief that it is
more likely than not that the tax benefit associated with these temporary
differences such as the tax operating loss carryforward, will be realized. A
valuation allowance is recorded for those deferred tax assets for which it is
more likely than not that realization will not occur in the near term.
Comprehensive Loss
- ------------------
The Company is required to present comprehensive loss and its components in a
full set of general purpose financial statements for all periods presented. The
Company's other comprehensive loss is comprised exclusively of net unrealized
holding losses on the available for sale securities portfolio. The Company has
elected to report the effects of other comprehensive loss as part of the
Consolidated Statement of Changes in Stockholders' Equity.
Loss Per Share
- --------------
The Company provides dual presentation of basic and diluted loss per share.
Basic loss per share is calculated utilizing net income as reported in the
numerator and average shares outstanding in the denominator. The computation of
diluted loss per share differs in that the dilutive effects of any stock
options, warrants, and convertible securities are adjusted in the denominator.
As more fully discussed in Note 12, during 1999, stock options on 82,350 shares
of common stock were granted to directors, officers, and certain employees.
These stock options were not included in computing diluted earnings per share
because their effects were antidilutive.
Stock Options
- -------------
The Company maintains a stock option plan for directors, officers, and
employees. When the exercise price of the Company's stock options is greater
than or equal to the market price of the underlying stock on the date of the
grant, no compensation expense is recognized in the Company's financial
statements. Pro forma net income and earnings per share are presented to reflect
the impact of the stock option plan assuming compensation expense had been
recognized based on the fair value of the stock options granted under the plan.
Intangible Assets
- -----------------
Intangible assets are comprised exclusively of goodwill resulting from the
branch office acquisitions in 1998. Goodwill is amortized using the
straight-line method over a 20-year period. Annual assessments of the carrying
values and remaining amortization periods of the goodwill are made to determine
possible carrying value impair-ment and appropriate adjustments as deemed
necessary.
Organizational and Start-up Activity Costs
- ------------------------------------------
Effective for fiscal years beginning after December 15, 1998, AICPA Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities," ("SOP")
requires entities to expense costs of such start-up and organizational
activities as incurred. The Company elected early adoption of this SOP and
implemented it, effective January 1, 1998. Accordingly, only those costs of
organization associated with the initial public offering ("IPO"), which were net
against the IPO proceeds, were not expensed.
35
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flow Information
- ---------------------
Management has defined cash equivalents as cash and due from banks and an
interest-bearing deposit with other banks.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133 precludes a held to maturity security from being
designated as a hedged item; however, at the date of initial application of this
Statement, an entity is permitted to transfer any held to maturity security into
the available for sale or trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported consistent with the
requirements of Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Such transfers do not raise an issue regarding an
entity's intent to hold other debt securities to maturity in the future. This
Statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 2000. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.
2. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for sale Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Government agency
securities $ 5,792,993 $ - $ (252,151) $ 5,540,842
Corporate securities 3,538,198 5,391 (17,151) 3,526,438
Collateralized mortgage
obligations issued by
U.S. Government agencies 4,612,322 - (219,631) 4,392,691
Mortgage-backed securities 1,999,829 - (62,398) 1,937,431
----------------- ----------------- ----------------- -----------------
Total debt securities 15,943,342 5,391 (551,331) 15,397,402
Federal Home Loan Bank stock 475,000 - - 475,000
----------------- ----------------- ----------------- -----------------
Total $ 16,418,342 $ 5,391 $ (551,331) $ 15,872,402
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Held to maturity
Mortgage-backed securities $ 1,674,729 $ - $ (74,989) $ 1,599,740
================= ================= ================= =================
</TABLE>
36
<PAGE>
2. INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Available for sale Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U.S. Government agency
securities $ 5,716,790 $ 4,048 $ (1,654) $ 5,719,184
Corporate securities 3,533,210 1,322 (13,295) 3,521,237
Mortgage-backed securities 3,624,154 - (21,007) 3,603,147
----------------- ----------------- ----------------- -----------------
Total debt securities 12,874,154 5,370 (35,956) 12,843,568
Equity securities 307,200 - - 307,200
----------------- ----------------- ----------------- -----------------
Total $ 13,181,354 $ 5,370 $ (35,956) $ 13,150,768
================= ================= ================= =================
</TABLE>
The amortized cost and estimated market value of investments in debt securities
available for sale at December 31, 1999, by contractual maturity, are shown
below. The Company's mortgage-backed securities and collateralized mortgage
obligations have contractual maturities ranging from six to twenty-nine years.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------------ ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Due after one year through
five years $ 2,094,006 $ 2,037,622 $ - $ -
Due after five years through
ten years 5,023,715 4,782,563 - -
Due after ten years 8,825,621 8,577,217 1,674,729 1,599,740
----------------- ----------------- ----------------- -----------------
Total $ 15,943,342 $ 15,397,402 $ 1,674,729 $ 1,599,740
================= ================= ================= =================
</TABLE>
The proceeds from the sale of an investment security available for sale and the
gross gain realized for the year ended December 31, 1999 were $428,555 and
$1,342, respectively. There were no sales in 1998.
Investment securities with amortized cost and estimated market values of
$13,787,716 and $13,335,390 and $7,584,427 and $7,554,427 at December 31, 1999
and 1998, respectively, were pledged to secure FHLB borrowings, public deposits,
and other purposes as required by law.
37
<PAGE>
3. LOANS RECEIVABLE
Loans receivable consists of the following at December 31:
1999 1998
------------- ----------------
Real estate loans:
Residential $ 16,126,655 $ 1,653,004
Home equity 2,377,059 997,740
Commercial 6,614,314 858,000
Commercial 1,639,033 163,122
Consumer loans 1,416,970 860,406
-------------- -------------
28,174,031 4,532,272
Less:
Deferred loan fees, net 7,676 9,152
Allowance for loan losses 186,647 98,988
-------------- -------------
Total $ 27,979,708 $ 4,424,132
============== =============
Aggregate loans of $60,000 or more extended to executive officers, directors,
and corporations in which they are beneficially interested as stockholders,
executive officers, or directors were $1,407,671 at December 31, 1999. An
analysis of these related party loans follows:
1998 Additions Repayments 1999
----------------- ----------------- ----------------- -----------------
$ 239,470 $ 1,213,756 $ 45,555 $ 1,407,671
The Company's primary business activity is with customers located within its
local trade area. Mortgage, consumer, and commercial loans are granted. Although
the Company's loan portfolio is diversified at December 31, 1999 and 1998, the
repayment of these loans is dependent upon the local economic conditions in its
immediate trade area.
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the years ended December 31, is as
follows:
1999 1998
------------- -------------
Balance, January 1 $ 98,988 $ -
Add:
Provision charged to operations 98,760 100,000
Recoveries 254 -
Less loans charged off 11,355 1,012
----------- ------------
Balance, December 31 $ 186,647 $ 98,988
=========== ============
38
<PAGE>
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1999 1998
----------- ------------
Leasehold improvements $ 61,156 $ 34,863
Furniture and equipment 160,362 95,303
---------- ----------
221,518 130,166
Less accumulated depreciation and amortization 45,931 4,006
---------- ----------
Total $ 175,587 $ 126,160
========== ==========
Depreciation and amortization expense for the years ended December 31, 1999 and
1998 was $41,925 and $4,006, respectively.
6. FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the FHLB System. As a member, the Bank maintains an
investment in the capital stock of the FHLB of Pittsburgh, at cost, in an amount
not less than the greater of one percent of its outstanding home loans or five
percent of its outstanding notes payable to the FHLB of Pittsburgh as calculated
at December 31 of each year.
7. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $2,463,964 at December 31, 1999. Deposits in
excess of $100,000 are not federally insured.
The scheduled maturities of time certificates of deposit as of December 31,
1999, are as follows:
Within three months $ 948,607
Three through six months 602,906
Six through twelve months 200,000
Over twelve months 685,451
-----------------
Total $ 2,436,964
=================
8. FHLB ADVANCES
At December 31, 1999, outstanding borrowings consisted of draws on the Bank's
"RepoPlus" line of credit and a fixed-rate, fixed-term advance, both with the
FHLB of Pittsburgh. Each advance has a term of 365 days. The RepoPlus line
carries an adjustable rate that is subject to annual renewal and incurs no
service charges. All outstanding borrowings are secured by a blanket security
agreement on qualifying residential mortgage loans, certain pledged investment
securities, and the Bank's investment in FHLB stock. The Bank's maximum
available borrowing limit with the FHLB was approximately $21 million during
1999.
Outstanding borrowings at December 31, 1998, were comprised solely of a
five-year "Convertible Select" fixed commitment advance arrangement for
$5,000,000 with the FHLB of Pittsburgh. The Bank satisfied this obligation
during 1999.
39
<PAGE>
8. FHLB ADVANCES (Continued)
The outstanding balances and related borrowing activity are summarized as
follows for the year ended December 31, 1999:
Balance at year-end $ 8,600,000
Maximum amount outstanding at any month-end 9,100,000
Average balance outstanding during the year 7,290,274
Weighted-average interest rate:
As of year-end 6.40%
Paid during the year 4.97%
9. COMMITMENTS
In the normal course of business, the Company makes various commitments that are
not reflected in the accompanying consolidated financial statements. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments is represented by the contractual amounts
as disclosed. The Company minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval and review procedures and
collateral requirements as deemed necessary. Commitments generally have fixed
expiration dates within one year of their origination.
The off-balance sheet commitments were comprised of the following:
1999 1998
----------------- -----------------
Commitments to extend credit:
Fixed rate $ 1,096,400 $ 611,700
Variable rate 4,634,382 2,326,000
----------------- -----------------
Total $ 5,730,782 $ 2,937,700
================= =================
The range of interest rates on fixed rate loan commitments was 6.75 percent to
11.99 percent at December 31, 1999.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement. These
commitments are comprised primarily of undisbursed residential construction
loans, available personal lines of credit, and loans approved but not yet
funded. Fees from the issuance of the credit lines are generally recognized over
the period of maturity.
The Company is committed under two non-cancelable operating leases for both of
the Bank's office facilities with remaining terms through 2007. At December 31,
1999, the minimum rental commitments under these leases are as follows:
2000 $ 130,512
2001 130,512
2002 130,512
2003 130,512
2004 113,177
Thereafter 266,724
-----------------
Total $ 901,949
=================
Occupancy and equipment expenses include rental expenditures of $115,580 and
$34,701 for 1999 and 1998, respectively.
40
<PAGE>
10. STOCKHOLDERS' EQUITY
Formation Capitalization and Initial Public Offering
- ----------------------------------------------------
Initial capitalization of the Company occurred through the subscription and
issuance of common stock in a private placement that was exclusively offered to
the organizers of the Company during the first quarter of 1998. A total of
29,998 shares, at an offering price of $10.00 per share, was issued and remains
outstanding.
The Company issued 537,438 shares of common stock at $10.00 per share in the IPO
completed in October 1998. The Company purchased all of the common stock issued
by the Bank using proceeds received from the IPO. Total initial Bank
capitalization was $5,425,000.
Common Stock Offering
- ---------------------
On September 16, 1999, the Board of Directors approved the offering of the
Company's common stock to existing shareholders and to the public. The offering
began on December 10, 1999, and will terminate no later than March 31, 2000. On
December 31, 1999, 79,040 shares were issued with net proceeds from the issuance
amounting to $820,235. Subsequent to December 31, 1999, the Company has realized
additional proceeds of $467,808 from the issuance of 42,528 shares on February
3, 2000. The Company has used $800,000 and $352,000, respectively, of the
closing proceeds for additional capitalization of the Bank.
11. REGULATORY MATTERS
Dividend Restrictions
- ---------------------
The Bank is subject to a dividend restriction that generally limits the amount
of dividends that can be paid by an OTS-chartered bank. OTS regulations require
the Bank to give the OTS 30 days notice of any proposed declaration of dividends
to the Company, and the OTS has the authority under its supervisory powers to
prohibit the payment of dividends by the Bank to the Company.
Regulatory Capital Requirements
- -------------------------------
Federal regulations require the Company and the Bank to maintain minimum amounts
of capital. Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total and Tier I capital to risk-weighted assets and of
Tangible and Core capital (as defined in the regulations) to adjusted assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly restrictive
regulatory actions.
As of December 31, 1999 and 1998, the FDIC categorized the Company and the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be classified as a well-capitalized financial institution, Total risk-based,
Tier 1 risk-based, and Core capital ratios must be at least ten percent, six
percent, and five percent, respectively.
41
<PAGE>
11. REGULATORY MATTERS (Continued)
Regulatory Capital Requirements (Continued)
- -------------------------------
The following table reconciles the Company's capital under generally accepted
accounting principles to regulatory capital:
1999 1998
--------------- --------------
Total stockholders' equity $ 5,231,403 $ 5,153,653
Unrealized loss on securities 545,940 30,586
Intangible assets (894,392) (941,886)
------------- -------------
Tier I, core, and tangible capital 4,882,951 4,242,353
Allowance for loan losses 186,647 98,988
------------- -------------
Total risk-based capital $ 5,069,598 $ 4,341,341
============= =============
The consolidated capital position of the Company does not materially differ from
the Bank's; therefore, the following table sets forth the Company's capital
position and minimum requirements for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------- --------------------------------
Amount Ratio Amount Ratio
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-weighted Assets)
- ---------------------------------------
Actual $ 5,069,598 17.8 % $ 4,341,341 32.3 %
For Capital Adequacy Purposes 2,274,800 8.0 1,074,640 8.0
To Be Well Capitalized 2,843,500 10.0 1,343,300 10.0
Tier I Capital (to Risk-weighted Assets)
- ----------------------------------------
Actual $ 4,882,951 17.2 % $ 4,242,353 31.6 %
For Capital Adequacy Purposes 1,137,400 4.0 537,320 4.0
To Be Well Capitalized 1,706,100 6.0 805,980 6.0
Core Capital (to Adjusted Assets)
- ---------------------------------
Actual $ 4,882,951 9.8 % $ 4,242,353 18.7 %
FDIC Denovo Capital Required 3,975,596 8.0 1,812,517 8.0
For Capital Adequacy Purposes 1,490,848 3.0 679,694 3.0
To Be Well Capitalized 2,484,747 5.0 1,132,823 5.0
Tangible Capital (to Adjusted Assets)
- -------------------------------------
Actual $ 4,882,951 9.8 % $ 4,242,353 18.7 %
For Capital Adequacy Purposes 745,424 1.5 339,847 1.5
</TABLE>
12. EMPLOYEE BENEFITS
Profit Sharing Plan
- -------------------
During 1999, the Company implemented a non-contributory profit sharing plan (the
"Plan") for officers and employees who have met the age and length of service
requirements. The Plan is a defined contribution plan, with contributions based
on a percentage of participants' salaries. In conjunction with the Plan, an
integrated 401(k) salary reduction plan was also implemented.
42
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
The Company may make matching contributions equal to a discretionary percentage
determined annually by the Board of Directors. Employee contributions are vested
at all times, and the Company contributions are fully vested after six years.
The Company made no profit sharing or matching contributions for the year ended
December 31, 1999.
Stock Option Plan
- -----------------
On October 23, 1998, the Board of Directors adopted a stock option plan for
directors, officers, and employees which was approved by the stockholders on May
24, 1999. The number of shares with respect to which awards may be made
available to the plan may not exceed 86,615 shares. Said shares may either be
from authorized but unissued common stock, treasury stock, or shares purchased
in the market for plan purposes. 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 equal to the fair value of a share of common
stock on the date the option is granted. Effective May 24, 1999, nonqualified
and qualified stock options were granted for the purchase of 82,350 shares. Of
this amount, 48,000 and 34,350 stock options were granted to nonemployee
directors and officers and employees, respectively. Options are exercisable in
annual installments of 33 1/3 percent for directors and 25 percent for officers
and employees, using the plan adoption date of October 23 as the anniversary
date. At the effective date of grant, one third of the directors' shares and one
fourth of the officers' and employees' shares were immediately vested and
exercisable.
The following table presents share data related to the outstanding options:
Weighted-
average
Exercise
Shares Price
---------------- -------------
Outstanding, January 1, 1999 - $ -
Granted 82,350 10.00
Exercised - -
Forfeited (100) 10.00
----------------
Outstanding, December 31, 1999 82,250 $ 10.00
================
Exercisable at year-end 49,152
================
The 1999 stock option grants have a remaining average life of 9.40 years at
December 31, 1999.
The Company accounts for its stock option plan under provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under this Opinion, no compensation expense has been recognized with respect to
the plans because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the grant date.
For purposes of computing pro forma results, the Company estimated the fair
values of stock options using the Black-Scholes option pricing model. The model
requires the use of subjective assumptions that can materially effect fair value
estimates. Therefore, the pro forma results are estimates of results of
operations as if compen-sation expense had been recognized for the stock option
plans. The fair value of each stock option granted was estimated using the
following weighted-average assumptions for grants in 1999; (1) risk-free
interest rate of 6.68 percent; (2) expected volatility of 6.22 percent; and (3)
expected lives of options were 10 years.
43
<PAGE>
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
- -----------------
Had compensation expense for the stock option plan been recognized in accordance
with the fair value accounting provisions of SFAS 123, "Accounting for
Stock-based Compensation," the net loss applicable to common stock and the basic
and diluted net loss per share for the year ended December 31, 1999, would be as
follows:
Net loss applicable to common stock:
As reported $ (227,131)
Pro forma (488,446)
Basic net loss per common share:
As reported $ (0.39)
Pro forma (0.85)
Diluted net loss per common share:
As reported $ (0.39)
Pro forma (0.85)
13. INCOME TAXES
The components of income taxes for the years ended December 31, are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Current payable:
Federal $ - $ -
State - -
----------------- -----------------
- -
Deferred taxes (72,167) (229,071)
Adjustment to valuation allowance for deferred tax assets 72,167 229,071
----------------- -----------------
Total $ - $ -
================= =================
</TABLE>
The following temporary differences gave rise to the net deferred tax assets:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net unrealized loss on securities $ 185,620 $ 10,400
Allowance for loan losses 40,577 31,574
Organization costs 52,923 66,063
Loan origination costs 2,610 -
Net operating loss carryforward 227,110 140,800
----------------- -----------------
Total gross deferred tax assets 508,840 248,837
Less valuation allowance 495,622 248,235
----------------- -----------------
Deferred tax assets after allowance 13,218 602
----------------- -----------------
Deferred tax liabilities:
Premises and equipment 7,400 378
Core deposit intangible 5,818
Loan origination costs - 224
----------------- -----------------
Total gross deferred tax liabilities 13,218 602
----------------- -----------------
Net deferred tax assets $ - $ -
================= =================
</TABLE>
44
<PAGE>
13. INCOME TAXES (Continued)
The Company represents an entity that has been in existence for less than two
years and has accumulated a net operating loss since its inception. As such,
management has established a valuation allowance for its deferred tax assets,
primarily the accumulated future tax benefits attributed to the operating loss
carryforward and loan loss provisions since it is more likely than not that
realization of these deferred assets cannot be fully supported at December 31,
1999 and 1998.
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ------------------------------------
% of % of
Pre-tax Pre-tax
Amount Loss Amount Loss
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Benefit at statutory rate $ (77,225) (34.0)% $ (169,957) (34.0)%
State income tax benefit,
net of federal tax (19,195) (8.5) (39,722) (7.9)
Adjustment of valuation
allowance for deferred
tax assets 72,167 31.8 229,071 45.8
Other, net 24,253 10.7 (19,392) (3.9)
----------------- ------------------ ----------------- -----------------
Actual tax benefit
and effective rate $ - - % $ - - %
================= ================== ================= =================
</TABLE>
At December 31, 1999, the Company has available a net operating loss
carryforward of $496,000 for federal income tax purposes. If unused, the
carryforwards will expire in the years 2018 to 2019. The Bank is subject to the
Pennsylvania Mutual Thrift Institution's tax that is calculated at 11.5 percent
of earnings based on generally accepted accounting principles with certain
adjustments. At December 31, 1999, the Bank has an available net operating loss
carryforward of $687,000 for state tax purposes that will expire in the years
2001 to 2002. The Company also has available a net operating loss carryforward
of $96,000 for state income tax purposes which will expire in the years 2008 to
2009.
14. OTHER EXPENSES
The following is an analysis of other expenses:
1999 1998
------------- --------------
Professional fees $ 94,755 $ 115,675
Stationery, printing, supplies, and postage 58,182 59,413
Amortization of intangible assets 43,538 7,908
Advertising 47,167 9,491
Correspondent bank charges 28,843 219
Other 142,579 54,183
----------- ------------
Total $ 415,064 $ 246,889
=========== ============
45
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks and
interest-bearing deposits $ 3,057,875 $ 3,057,875 $ 5,929,243 $ 5,929,243
Investment securities 17,547,131 17,472,142 13,150,768 13,150,768
Loans receivable 27,979,708 27,694,124 4,424,132 4,496,056
Accrued interest receivable 346,059 346,059 165,446 165,446
----------------- ----------------- ----------------- -----------------
Total $ 48,930,773 $ 48,570,200 $ 23,669,589 $ 23,741,513
================= ================= ================= =================
Financial liabilities:
Deposits $ 35,783,224 $ 35,730,224 $ 13,992,384 $ 14,020,930
FHLB advance 8,600,000 8,591,000 5,000,000 5,000,000
Accrued interest payable 370,171 370,171 94,345 94,345
----------------- ----------------- ----------------- -----------------
Total $ 44,753,395 $ 44,691,395 $ 19,086,729 $ 19,115,275
================= ================= ================= =================
</TABLE>
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas. As many
of these assumptions result from judgments made by management based upon
estimates which are inherently uncertain, the resulting estimated fair values
may not be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in the assumptions on which the
estimated fair values are based may have a significant impact on the resulting
estimated fair values.
As certain assets, such as deferred tax assets and premises and equipment, are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed estimates using discounted cash flows in determining the
estimated fair value of financial instruments for which quoted market prices
were not available based upon the following assumptions:
Cash and Due from Banks, Interest-bearing Deposits with Other Banks, Accrued
- -----------------------------------------------------------------------------
Interest Receivable, and Accrued Interest Payable
- -------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
- ---------------------
The fair value of investment securities is equal to the available quoted market
price. If no quoted market price is available, fair value is estimated using the
quoted market price for similar securities.
46
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans Receivable, Deposits, and FHLB Advances
- ---------------------------------------------
The fair value of loans is estimated using discounted contractual cash flows
generated using prepayment estimates. Discount rates are based upon current
market rates generally being offered for new loan originations with similar
credit and payment characteristics. Savings, checking, and money market deposit
accounts are valued at the amount payable on demand as of year-end. Fair values
for time deposits and the FHLB borrowings are estimated using a discounted cash
flow calculation that applies contractual costs currently being offered in the
existing portfolio to current market rates being offered for deposits and
borrowings of similar remaining maturities.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 9.
16. BRANCH PURCHASE AND ASSUMPTION AGREEMENT
On March 24, 1998, the Company, through its organizers, entered into a Branch
Purchase and Deposit Assumption Agreement (the "Agreement") with First
Commonwealth Financial Corp. ("FCFC"), for the acquisition of certain assets and
the assumption of certain deposit liabilities related to FCFC's branch offices
located at 116 East College Avenue and 1276 North Atherton Street, State
College, Pennsylvania. The effective closing date of the trans-actions occurred
on October 23, 1998, in conjunction with the initiation of banking operations.
Pursuant to the Agreement, the Company, through its subsidiary, the Bank: (i)
assumed approximately $10.2 million of deposit liabilities; (ii) purchased, at
book value, loans from these offices that are secured by deposit accounts and
unsecured loans created by overdraft line arrangements with the customer; (iii)
purchased, at book value, furniture, fixtures, equipment, and leasehold
improvements owned by FCFC and located at each branch office; (iv) purchased the
safe deposit box business conducted at the branches; (v) assumed the lease
contracts for each office; and (vi) purchased all cash funds on hand at each
office.
In consideration for the assumption of the deposit liabilities, the Company paid
FCFC a deposit premium of ten percent. The premium was paid using cash (nine
percent) and common stock of the Company (one percent).
47
<PAGE>
17. PARENT COMPANY
Following are condensed financial statements for Nittany Financial Corp.:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash $ 31,656 $ 9,327
Investment in subsidiary bank 5,206,747 4,930,945
Other assets - 361,666
-------------------- --------------------
TOTAL ASSETS $ 5,238,403 $ 5,301,938
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 7,000 $ 148,285
Stockholders' equity 5,231,403 5,153,653
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,238,403 $ 5,301,938
==================== ====================
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
INCOME $ - $ 16,538
EXPENSES 34,908 251,064
-------------------- --------------------
Loss before equity in undistributed net loss of subsidiaries (34,908) (234,526)
Equity in undistributed net loss of subsidiaries (192,223) (287,174)
-------------------- --------------------
NET LOSS $ (227,131) $ (521,700)
==================== ====================
</TABLE>
48
<PAGE>
17. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (227,131) $ (521,700)
Adjustments to reconcile net loss to net cash used for
operating activities:
Equity in undistributed net loss of subsidiaries 192,223 463,468
Other, net 47,002 (146,779)
-------------------- --------------------
Net cash provided by (used for) operating activities 12,094 (205,011)
-------------------- --------------------
INVESTING ACTIVITIES
Initial capitalization of subsidiary bank - (5,425,000)
Initial capitalization of Nittany
(10,000) -
Capital contribution to subsidiary bank (800,000) -
-------------------- --------------------
Net cash used for investing activities (810,000) (5,425,000)
-------------------- --------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 820,235 5,609,889
-------------------- --------------------
Net cash provided by financing activities 820,235 5,609,889
-------------------- --------------------
Increase (decrease) in cash 22,329 (20,122)
CASH AT BEGINNING OF PERIOD 9,327 29,449
-------------------- --------------------
CASH AT END OF PERIOD 31,656 $ 9,327
==================== ====================
</TABLE>
49
<PAGE>
Item 8. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
---------------------
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
---------------------------------------
Board of Directors
David K. Goodman, Jr., 46, is the President and Chief Executive Officer
of D. C. Goodman & Sons, Inc., a Huntingdon based contracting firm. The firm
specializes in construction for industry, institutions, and commercial customers
in the fields of fire protection sprinkler systems, mechanical, and electrical
contracting. Mr. Goodman is a member of the board of directors of Huntingdon
County United Way, J. C. Blair Memorial Hospital, and Huntingdon County Business
and Industry. He is also a member of the Trustee's Council of Juniata College.
Mr. Goodman received his education at Juniata College and holds numerous
professional memberships in fire protection and contracting organizations.
William A. Jaffe, 61, the President and owner of The Jaffe Group, a
Human Resource Consultancy, headquartered in State College, Pennsylvania, which
he established in January 1996. Previously, he was Compensation and Human
Resource Practice Leader for the Mid-Atlantic Region of Alexander & Alexander
Consulting Group. Mr. Jaffe received his Bachelor of Arts degree in journalism
from Penn State University and Masters of Science degree in Management from the
University of Illinois. He is President of The Mount Nittany Conservancy and on
the Executive Committee for the Nittany Lion Club, the Penn State College of
Communications Alumni Society, and is chair of the Penn State Hillel Foundation.
For two years, he served as the chair of the Chamber of Business & Industry of
Center County's Human Resource Committee. He served as an adjunct associate
professor at The George Washington University from 1991 to 1995. In 1996, Mr.
Jaffe was named a Penn State Alumni Fellow.
Samuel J. Malizia, 45, is the Chairman of the Board of the Company and
Nittany Bank. Mr. Malizia is the managing partner of the law firm of Malizia
Spidi & Fisch, PC, a law firm headquartered in Washington, DC with a State
College, Pennsylvania office. For over 19 years, Mr. Malizia has specialized in
transactional, securities and regulatory matters for financial institutions and
related entities. He received a Bachelor of Science Degree with Distinction in
accounting from the Pennsylvania State University and a Juris Doctor Degree from
the George Washington University. He served as Attorney Advisor to Special Trial
Judge Francis Cantrel at the United States Tax Court and attended the Masters of
Law in Taxation program at the Georgetown University where he was associate
editor of the Tax Lawyer. He is a member of the Pennsylvania and District of
Columbia bars, the U.S. Tax Court, U.S. Claims Court, U.S. Court of Appeals for
the District of Columbia and a member of the Federal Bar Association and
American Bar Association. He is an alumnus of several Penn State University's
organizations, including Lions Paw, Skull and Bones Honor Society, Beta Alpha
Psi and Omicron Delta Kappa. He serves on the board of directors of the Lions
Paw Alumni Society and the Mount Nittany Conservancy.
50
<PAGE>
J. Garry McShea, 45, has been owner and founder of the J.G. McShea
Construction Company, Boalsburg, Pennsylvania since 1978. McShea Construction
specializes in custom home construction, remodeling projects,
commercial/residential rental properties and land development. Prior to this,
Mr. McShea was employed by Certain Teed Corporation, Valley Forge, Pennsylvania,
as a Residential Building Material Specialist. Mr. McShea is a past President
and 22 year member of the Builders Association of Central Pennsylvania. He is a
Director of the Tussey Mountain Ski Corporation and serves on the Harris
Township Planning Commission. Mr. McShea received a Bachelor of Science Degree
in Marketing from the Pennsylvania State University College of Business.
Donald J. Musso, 40, is the founder of FinPro, Inc., a consulting and
investment banking firm which specializes in providing advisory services
nationally to the financial institutions industry. Mr. Musso has a Bachelor of
Science in Finance from Villanova University and an MBA in Finance from
Fairleigh Dickinson University. Mr. Musso's corporation has represented hundreds
of financial institutions nationally in connection with business plans,
appraisals, asset liability management, mergers and acquisitions, branch
acquisitions and de novo financial institutions. Prior to establishing FinPro,
he had direct industry experience, having managed the Corporate Planning and
Mergers and Acquisitions departments for Meritor Financial Group, a $20 billion
dollar institution in Philadelphia. Prior to that, he was responsible for the
banking, thrift and real estate consulting practice in New Jersey for DeLoitte,
Haskins and Sells. He is also an instructor of strategic planning for the
Stonier Graduate School of Banking.
David Z. Richards, Jr., 39, is President and CEO of the Company and
Nittany Bank. Mr. Richards was President and Chief Executive Officer of
Mifflinburg Bank and Trust Company of Mifflinburg, Pennsylvania from 1991 until
1997. From 1978 until 1990, he served in various capacities, including Vice
President and Financial Officer of The First National Bank of Danville,
Pennsylvania. In 1997 he was appointed to the Executive Committee of the
Pennsylvania Bankers Association, for which he has chaired and served on several
committees. He formerly served as President of LUN Data Inc., a multi-owned data
processing consortium. Mr. Richards has a Bachelor of Science in Finance from
Susquehanna University and is a graduate of The Stonier Graduate School of
Banking.
D. Michael Taylor, 57, is an architect, real estate developer and
entrepreneur, who has resided in the State College area for 28 years. Mr. Taylor
has a Bachelor of Architecture degree from Kansas State University. Upon
graduation, he spent several years in commercial architecture for Phillips
Petroleum and other firms, specializing in retail construction for national
companies. In addition to his architecture practice, Mr. Taylor is part owner of
Gwald/Taylor, a firm specializing in industrial process equipment sales to the
paper and pulp industry.
Community Advisory Board of Directors
Nittany Bank has created a Community Advisory Board of Directors to
help evaluate the needs of the community and to solicit ideas and comments from
the business community and general populous. The members of the Community
Advisory Board are selected on a yearly basis and meet at least every calendar
quarter. The Community Advisory Board serves by an appointment from the Board of
Directors of Nittany Bank. Set forth below are the names of the members of the
Community Advisory Board along with a brief description of their occupation.
51
<PAGE>
Craig Avedesian is the President and part-owner of Federal Carbide Co.
located in Tyrone, Pennsylvania. Mr. Avedesian is a resident of State College,
Pennsylvania.
Dr. Richard Doerfler is in private practice as an orthodontist in State
College, Pennsylvania. Dr. Doerfler is a resident of State College,
Pennsylvania.
Kelly Grimes is the President and owner of the Wendy's franchise stores
located in State College, Pennsylvania. Ms. Grimes is a resident of State
College, Pennsylvania.
Hugh Manion is a general manager of Bell Atlantic, Inc. in State
College, Pennsylvania. Mr. Manion is a resident of State College, Pennsylvania.
James Meister is a Special Assistant to the Athletic Director of the
Pennsylvania State University, State College, Pennsylvania. He is a retired vice
president of ALCOA. Mr. Meister is a resident of State College, Pennsylvania.
Lori Pacchioli is the Director of Marketing for Penn State broadcasting
State College, Pennsylvania. Ms. Pacchioli is a resident of State College,
Pennsylvania.
Anne Riley is a member of the Pennsylvania State Board of Trustees and
is past president of the Pennsylvania State University Alumni Association, State
College, Pennsylvania. Ms. Riley is also a member of the Renaissance board of
directors and the Mt. Nittany Conservatory board of directors, State College,
Pennsylvania. She is a resident of State College, Pennsylvania.
Richard Shore is Vice President of Corporate Development and Tax
Affairs for Tele-Media, Corporation of Delaware, Inc., Pleasant Gap,
Pennsylvania. Mr. Shore is a resident of State College, Pennsylvania.
Donn Wagner is President of Alleghencies Analysis, Boalsburg,
Pennsylvania. Mr. Wagner is a resident of Boalsburg, Pennsylvania.
D. Patrick Daugherty is owner of Tavern Restaurant, State College,
Pennsylvania.
Executive Officers Who Are Not Directors
Richard C. Barrickman, 48, was appointed Senior Vice President upon
completion of the formation of Nittany Bank on October 23, 1998. Mr. Barrickman
was employed by PNC Bank, N.A. ("PNC") and its predecessors through mergers.
Prior to merger with PNC and its predecessors in 1982, Mr. Barrickman was the
President of Mt. Nittany Savings and Loan Association. Mr. Barrickman is a
native of State College, Pennsylvania.
John E. Arrington, 35, was appointed Vice President of Retail Banking
upon completion of the formation of Nittany Bank on October 23, 1998. He is also
President of Nittany Asset Management, Inc. Previous to his appointment with
Nittany Bank, Mr. Arrington was employed by PNC and its predecessors, serving in
a variety of capacities, most recently as Vice President. Mr. Arrington is past
President of the Board of the Nittany Valley Symphony.
52
<PAGE>
Item 10. Executive Compensation
- --------------------------------
Director Compensation
Directors and advisory directors have received no compensation for
their services, since the incorporation of the Company.
Stock Option Plan
The 1998 stock option plan ("Option Plan") was approved by stockholders
on May 24, 1999 (the "effective date of grant"). Pursuant to the plan, each
director and executive officer was previously granted options on October 23,
1998 to purchase shares of the Company's Common Stock at an exercise price of
$10.00 per share pursuant to a stock option plan which was subject to subsequent
stockholder approval. Messrs. Malizia and Richards were each granted options to
purchase 20,000 shares of Common Stock and Mr. Musso was granted options to
purchase 10,000 shares of Common Stock. Messrs. Jaffe and Taylor were each
granted options to purchase 5,000 shares of Common Stock and Messrs. Goodman and
McShea were each granted options to purchase 4,000 shares of Common Stock. Of
the options granted to each of the directors, except for Mr. Richards, 33 1/3%
of the options were exercisable on the effective date of grant and the remaining
options are exercisable at the rate of 33 1/3% per year using the board approval
date of October 23, 1998 ("board approval date".) For Mr. Richards, 25% of the
options were exercisable on the effective date of grant and the remaining
options are exercisable at the rate of 25% per year on the board approval date.
All directors and full-time employees were granted stock options under the
option plan approved by stockholders on May 24, 1999.
Executive Officer Compensation
The Company has no full time employees, but relies on the employees of
the Bank for the limited services required by us. All compensation paid to
officers and employees is paid by the Bank.
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the chief executive officer. No
other executive officer of either Nittany Bank or the Company had a salary and
bonus during the years ended December 31, 1999 that exceeded $100,000 for
services rendered. Mr. Richards employment with Nittany Bank commenced on
October 23, 1998.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
---------------------------------------- --------------
Securities
Name and Fiscal Other Annual Underlying All Other
Principal Position Year Salary($) Bonus($) Compensation Options(#) Compensation($)
- ------------------- ---- --------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David Z. Richards 1999 100,000 15,000 -- 20,000(1) --
President and CEO 1998 76,666 -- -- -- --
</TABLE>
- ------------
(1) Such awards under the Option Plan were immediately exercisable (25%)
commencing on May 24, 1999. The remaining shares granted vest at a rate
of 25% on the anniversary date of the grant approval by the Board of
Directors, which was October 23, 1998. The exercise price equals the
market value of the Common Stock on the date of grant of $10.00.
See--"Stock Awards".
53
<PAGE>
Employment Agreement. The Company entered into an employment agreement
with David Z. Richards, President and Chief Executive Officer in December 1997.
Mr. Richards's base salary under the agreement is $100,000. Under the terms of
the agreement, Mr. Richards salary was 72% of the $100,000 base salary prior to
the time the Bank opened for business. The agreement has a term of three years
and may be terminated by us for "just cause" as defined in the agreement. If the
Company terminates Mr. Richards without just cause, Mr. Richards will be
entitled to a continuation of his salary from the date of termination through
the remaining term of the agreement. The agreement contains a provision stating
that in the event of the termination of employment in connection with a change
in control of us, Mr. Richards will be paid a lump sum amount equal to 2.99
times his five year average annual taxable compensation. If such payments had
been made under the agreement as of December 31, 1999, such payments would have
equaled approximately $265,000. The agreement may be renewed annually by
Nittany's Board of Directors upon a determination of satisfactory performance
within the Board's sole discretion. The agreement was renewed for an additional
year (i.e., until December 31, 2002) by the Board of Directors in January 2000.
If Mr. Richards shall become disabled during the term of the agreement, he shall
continue to receive payment of 80% of the base salary for a period of 3 months
and 50% of such base salary for a period of 12 months, but not exceeding the
remaining term of the agreement. Such payments shall be reduced by any other
benefit payments made under other disability programs in effect for the Bank's
employees.
Stock Awards. The following tables set forth additional information
concerning stock options granted during the 1999 fiscal year pursuant to the
Option Plan to the named executive officer in the Summary Compensation Table and
the year end value of such outstanding options. No Stock Appreciation Rights
(SARs) are authorized under the plan.
<TABLE>
<CAPTION>
OPTION GRANTS TABLE
Option grants in Last Fiscal Year
---------------------------------
Individual Grants
- ------------------------------------------------------------------------------------------------------
% of Total
# of Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
- ---- ---------- ----------- ------ ----
<S> <C> <C> <C> <C>
David Z. Richards 20,000 58% $10.00 May 24, 2009
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year, and FY-End Option Values
-------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options/SARs
FY-End (#) at FY-End ($)
Shares Acquired ---------- -------------
Name on Exercise (#) Value Realized($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ---- --------------- ----------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
David Z. Richards 0 0 10,000 / 10,000 5,000 / 5,000
</TABLE>
- ------------------
(1) Based upon an exercise price of $10.00 per share and estimated price of
$10.50 at December 31, 1999.
54
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Based upon the records of Nittany's transfer agent, the following table
sets forth, as of December 31, 1999, persons or groups who own more than 5% of
the Common Stock and the ownership of all executive officers and directors of
Nittany as a group. Other than as noted below, management knows of no person or
group that owns more than 5% of the outstanding shares of Common Stock at that
date.
<TABLE>
<CAPTION>
Percent of Shares
Amount and Nature of of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership(1) Outstanding(%)
- -------------------------------------------------- ----------------------------- -------------------
<S> <C> <C>
Samuel J. Malizia 65,502(1) 9.8
J. Garry McShea 34,337(1) 5.2
Donald J. Musso 39,009(1) 5.9
All directors and executive officers of the
Company as a group (9 persons) 223,276(2) 31.5
</TABLE>
- -------------------
(1) Includes shares of Common Stock held directly as well as by spouses or
minor children, in trust and other indirect ownership, over which
shares the individuals effectively exercise sole voting and investment
power, unless otherwise indicated. Also, includes shares of common
stock that the named persons have a right to purchase pursuant to
exercisable stock options within 60 days of December 31, 1999, as
follows: J. Garry McShea - 2,666 shares, Samuel J. Malizia - 13,334
shares, and Donald J. Musso - 6,667 shares.
(2) Includes 48,497 shares of common stock that the nine individuals have a
right to purchase pursuant to stock options that are exercisable within
60 days of December 31, 1999.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The Bank , like many financial institutions, have followed a policy of
granting various types of loans to officers, directors, and employees. The loans
have been made in the ordinary course of the Bank's business and on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the Bank's other
customers, and do not involve more than the normal risk of collectibility, or
present other unfavorable features.
Item 13. Exhibits, List and Reports on Form 8-K
- -----------------------------------------------
(a) The following exhibits are included in this Report or incorporated
herein by reference:
<TABLE>
<CAPTION>
<S> <C>
3(i) Amended Articles of Incorporation of Nittany Financial Corp. **
3(ii) Bylaws of Nittany Financial Corp. **
4 Specimen Stock Certificate of Nittany Financial Corp. **
10.1 Employment Agreement between the Bank and David Z. Richards **
10.2 Nittany Financial Corp. 1998 Stock Option Plan
21 Subsidiaries of the Registrant (See "Item 1- Business")
27 Financial Data Schedule (electronic filing only)
</TABLE>
- --------------------
** Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-57277) declared
effective by the SEC on July 31, 1998.
(b) Reports on Form 8-K.
None.
55
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of March 28, 2000.
NITTANY FINANCIAL CORP.
By: /s/David Z. Richards
---------------------------------
David Z. Richards
President, C.E.O. and Director
(Duly Authorized Representative )
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 28, 2000.
/s/Samuel J. Malizia /s/David Z. Richards
- ---------------------------------------- ---------------------------------
Samuel J. Malizia David Z. Richards
Chairman of the Board of Directors President, C.E.O. and Director
(Principal Executive Officer and
Principal Financial Officer)
/s/Donald J. Musso
- ---------------------------------------- ---------------------------------
Donald J. Musso William A. Jaffe
Director Director and Secretary
/s/J. Garry McShea
- ---------------------------------------- ---------------------------------
D. Michael Taylor J. Garry McShea
Director Director
/s/David K. Goodman, Jr.
- ----------------------------------------
David K. Goodman, Jr.
Director
EXHIBIT 10.2
<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
- 2 -
<PAGE>
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.
- 3 -
<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
- 4 -
<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
- 5 -
<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
- 6 -
<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.
- 7 -
<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
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 826
<INT-BEARING-DEPOSITS> 2,232
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,872
<INVESTMENTS-CARRYING> 1,675
<INVESTMENTS-MARKET> 1,600
<LOANS> 27,980
<ALLOWANCE> 187
<TOTAL-ASSETS> 50,045
<DEPOSITS> 35,783
<SHORT-TERM> 8,600
<LIABILITIES-OTHER> 430
<LONG-TERM> 0
0
0
<COMMON> 66
<OTHER-SE> 5,165
<TOTAL-LIABILITIES-AND-EQUITY> 50,045
<INTEREST-LOAN> 1,337
<INTEREST-INVEST> 1,012
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 2,449
<INTEREST-DEPOSIT> 1,093
<INTEREST-EXPENSE> 1,455
<INTEREST-INCOME-NET> 994
<LOAN-LOSSES> 99
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<INCOME-PRETAX> (227)
<INCOME-PRE-EXTRAORDINARY> (227)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (227)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
<YIELD-ACTUAL> 2.71
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</TABLE>
